FFI ANNUAL CONFERENCE FAMILY BUSINESS RESEARCH & EDUCATION SYMPOSIUM

OCTOBER 29, 2008, LONDON

FAMILY FIRM MERGERS & ACQUISITIONS IN DIFFERENT LEGAL ENVIRONMENTS

Isabel Feito-Ruiz Susana Menéndez-Requejo

Department of Finance. Family Business Chair. University of Oviedo. SPAIN.

CONTACT INFORMATION: Address: Susana Menéndez Requejo. Faculty of Economics. Avda. del Cristo s/n. 33071 Oviedo. Spain

srequejo@uniovi.es or catedraef@uniovi.es Phone: +34 985 10 39 12 FAX: +34 985 10 37 08

Abstract

This study analyses family versus non-family firm returns under different legal environments

when a Merger and Acquisition (M&A) is announced. The database includes M&As of

European listed firms, with target firms being worldwide public or private firms, over the

2002-2004 period.

Shareholders of bidder family firms value better the M&A announcement compared to non-

family firm shareholders. Cumulative Average Abnormal Return, in (-2,+2), is 1.18% for the

whole sample, 2.82% for family firms and 0.92% for non-family firms. Family ownership is a

positive factor in bidder shareholder M&A valuation in environments with higher shareholder

protection, better accounting standards, greater financial development (GDP) and better

corruption control.

JEL Codes: G30; G32; G34; F30.

Key Words: Mergers and Acquisitions, Family Firms, Bidder, Abnormal Return, Legal

Environment, Investor Protection.

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1. Introduction

Competition for market share influences firm strategy, with M&As being one of the main

ways for firms to grow, yet also supposing an important challenge for family firms. Empirical

research shows mixed results in relation to firm wealth creation after an M&A announcement.

Moreover, differences in M&A market valuation between family and non-family firms, as

well as the influence of the legal environment, are incipient topics. These are the motivations

and research objectives of this paper.

The database to test the theoretical proposals considers Mergers and Acquisitions for

European listed firms over the 2002-2004 period, distinguishing between family and non-

family firms, with target firms being worldwide public or private firms. We will compare

bidder shareholder wealth creation between family and non-family firm M&As, using event

study methodology and multivariate analysis and controlling by the differences in the legal

environment of the countries of acquiring and acquired firms. This paper will also present a

database which includes not only domestic operations, but cross-border ones as well, and also

analyzes unlisted firm acquisition. In contrast with other research studies which consider

exclusively European firms, or only American firms, or exclusively listed firms, or only

financial or non-financial firms.

We have structured the paper into the following sections: in the second section, we analyze

the precedents in the financial literature related to shareholder M&A valuation, as well as the

influence of the legal and institutional environment, and propose the hypotheses under study;

in the third section, we present the database and descriptive statistics; in the fourth section, we

summarize the results of the analysis of abnormal returns and their differences according to

the legal and institutional environment; in the fifth section, we carry out a multi-variant

analysis of abnormal return determinants; and, in the sixth and final section, we present our

conclusions.

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2. Firm acquisition valuation: Research background

One of the reasons motivating this research is that the results found in empirical studies on the

acquiring-firm shareholders valuation are contradictory. While research studies agree on the

positive valuation that acquired-firm shareholders make, the same does not occur when

analyzing the valuation of acquiring-firm shareholders. Some studies conclude that acquiring-

firm shareholders negatively value the announcement of an M&A,1 while others obtain

positive abnormal returns.2 To reflect upon the reasons for these divergences, it is necessary

to examine the differences in the analyzed databases, as well as to study the relevance of the

characteristics of the firms involved and the transactions. Among the former studies,

concerning firms listed in the USA, Travlos (1987) obtains a cumulative abnormal return for

the acquiring firm of -1.6% when payment is made in shares of stock and of -0.13% when in

cash. For the USA, Chang (1998) reports a cumulative abnormal return of 0.09% when

unlisted firms are acquired and payment is in cash, and -0.02% when the target firms are

listed. When the transaction payment is in shares of stock, the abnormal return takes the value

of 2.64%, if the target firm is unlisted, and -2.46%, if listed.

The increase in merger and acquisition operations in the European market since the 1990s

allows for comparing results with those of the American market. Several papers focus on

acquisitions carried out by European financial firms, such as Cybo-Ottone and Murgia (2000),

who report positive abnormal returns of 0.99% for acquiring-firm shareholders, although

there are those who obtain negative cumulative returns: Beitel et al. (2002), -0.01% for

1 Travols, 1987; Walter, 2000; De Long, 2001; Beitel and Arbour, 2002; Gregory and McCorriston, 2002; Georgen and Renneboog, 2004; Campa and Hernando, 2006; Hagendorff, Collins, and Keasey, 2007. 2 Maquieria, Megginson and Nail, 1998; Fuller, Netter and Stegemoller, 2002; Raj and Forsyth 2002; Campa and Hernando, 2004; Moeller, Schillingemann and Stulz, 2004; Ben-Amar and André, 2006; Faccio, McConnell and Stolin, 2006.

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operations in any part of the world; Campa and Hernando (2006), -0.87% for European

operations; or Hagendorff et al. (2007), -0.32% for European and American financial firms. In

the USA, studies with databases starting from the 1980s or 90s again obtain diverse results:

Mulherin and Boone (2000), -0.37 %; Walker (2000), -0.30% for non-financial firms; and

DeLong (2001), -1.68%, while Moeller et al. (2004) obtain abnormal returns of 1.10% and

Fuller et al. (2002), 1.77% for non-financial firms.

2.1. Acquiring-shareholder valuation determinants: transaction and firm characteristics

A review of studies undertaken to date underscores the following characteristics of the

transactions and firms involved as determinants for acquiring-shareholder valuation:

a) Method of payment. If management considers that the shares of their firm are

overvalued, they will prefer to pay an M&A operation in shares of stock. Thus, the

announcement of an acquisition paid in shares of stock will be a negative sign to the

acquiring-firm shareholders and therefore valued negatively (Myers and Majluf,

1984). On the other hand, they will positively value payment in cash (Travlos, 1987;

Sudarsanam and Mahate, 2003).

b) Friendly vs hostile takeover. Hostile takeovers raise the price paid for the target firm,

which determines a negative acquiring-firm shareholder valuation (Schwert, 1996;

Gregory, 1997; Schwert, 2000; Campa and Hernando, 2004).

c) Focus vs diversification. Empirical studies obtain mixed results regarding M&A

valuation which implies the diversification of business focus. Jensen and Ruback

(1983), Bradley, Desai and Kim (1988), Campa and Kedia (2002), and Raj and

Forsyth (2002) associate wealth creation to M&As which diversify, while Morck,

Sheleifer and Visnhny (1990), Lang and Stulz (1994), Berger and Ofek (1995), and

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Maquieria et al. (1998) conclude that diversification diminishes acquiring-shareholder

wealth due to the fact that management tends to overpay.

d) Cross-Border vs Domestic Transactions. Studies for periods following the 1990s

coincide in the positive acquiring-firm shareholder valuation of a cross-border M&A

announcement both in the United States (Francis, Hansan and Sun, 2007) and in

Europe (Martynova and Renneboog, 2008; Antoniu, Petmezas and Zhao, 2007),

although domestic operations generate greater returns. Integration costs and cultural

problems should be taken into account.

e) Managerial opportunism and growth opportunities. It is more likely that firms with

free cash-flow carry out acquisitions no matter the circumstances (Harford, 1999), and

therefore that their shareholders negatively value the announcement. Lang, Stulz and

Walking (1989) show that firms with a high market-to-book ratio obtain high

abnormal returns around the acquisition announcement, while Dong, Hirshleifer,

Richardson and Teoh (2006) find to the contrary, which leads them to consider the

ratio as a proxy for overvaluation.

f) Size of acquiring firm. The greater separation between ownership and control, which

tends to exist in large firms, may favor managerial interest in M&As, even though this

be overpaid (managerial hubris hypothesis, Roll, 1986), motivating a worse valuation

on the part of the acquiring-firm shareholders (Schewert, 2000, Beitel et al., 2004,

Moeller, 2004).

g) Relative size of the target firm. On the one hand, the larger the target firm is, the more

information there will be on the firm, as well as less adverse selection problems in

their valuation (Asquith, Bruner and Mullins, 1983). On the other hand, however, this

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will generate higher integration costs between the two firms (Agrawal, Jaffe and

Mandelker, 1992), which acquiring-firm shareholders will value negatively.

h) Target Firm Listing. The majority of studies analyze acquisitions of market listed

firms. Acquiring a listed firm generates the free-rider problem (Grossman and Hart,

1980) by attracting potential buyers, which raises the payment price. The acquisition

of an unlisted firm does not generate as much competition. Moreover, adverse

selection forces the price to drop (Akerlof, 1970). Faccio et al. (2006) obtain positive

abnormal returns, 1.48%, when the target firm is unlisted and negative returns, -0.38%

when it is listed. Chan (1998), Fuller et al. (2002), Moeller et al. (2004), and Conn,

Cosh, Guest and Hughes (2005) also show greater gains when purchasing private

companies.

2.2. Bidder ownership structure: family vs non-family firms

Bidder ownership structure and its influence on the wealth creation surrounding an M&A is

an aspect which has yet to receive attention. However, studies do relate family or non-family

ownership structure to firm performance.3

Family ownership may influence shareholder valuation of growth operation announcements,

such as M&As, especially minority shareholder valuation.

A) On the one hand, acquiring family firms may seek mainly to benefit the family's interests

at the expense of minority shareholders, and thus negative shareholder returns would be

expected when the M&A is announced (Claessens, Djankov, Fan and Lang, 2002). Large

shareholders, like families, may transfer assets or profits to other firms that they own (i.e.

3 McConaughy, Walker, Henderson and Mishra (1998), Anderson and Reeb (2003), Barontini and Caprio (2006), Maury (2006), Menéndez (2006), Poutziouris (2006), Villalonga and Amit (2006), Chang and Shin (2007), Millar, Le Breton-Miller and Cannella (2007).

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tunneling) (Johnson, La Porta, López-Silanes and Shleifer, 2000). Tunneling may refer to

excessive compensation for family positions in the firm, advantageous transfer prices or

loans, loan guarantees, or M&A operations that enhance the value of other owned

companies. We call this hypothesis “family-firm opportunism in M&As”.

B) On the other hand, family firms may be characterized by long-term perspectives, given

their interest in transferring the business on to future generations (James, 1999). Thus,

strategic decisions such as an M&A would be fostered. Furthermore, reduced

management-shareholder agency conflicts in family firms may favor positive shareholder

valuation when M&As are announced (Anderson and Reeb, 2003). We call this

hypothesis “family-firm efficiency in M&As”. According to these arguments, Ben-Amar

and André (2006) find that abnormal returns around the announcement of the acquiring

firm, for a sample of Canadian transactions, are positive and greater for family versus

non-family firms, 2.1% versus 0.2% abnormal returns, respectively. They state that

market participants do not perceive families as using an M&A to obtain private benefits at

the expense of minority shareholders.

It is our aim to test these contradictory hypotheses.

2.3. Influence of the legal and institutional environment on merger-acquisition valuation

The analysis of ownership structure influence on M&A market valuation should also bear in

mind that ownership structures differ across countries and depend on the legal and

institutional environment. English (common law) countries are characterized by greater

shareholder protection and a more disperse ownership structure, with agency problems arising

especially from management-shareholder conflicts of interest. However, in continental Europe

(civil law, differentiating between French, German and Scandinavian models), less legal

protection of minority shareholders determines more concentrated ownership structures, so

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that the most relevant agency problems are those associated with the possible wealth

expropriation of minority shareholders by the controlling shareholders (La Porta, López-de-

Silanes, Shleifer and Visnhy, 1997).

This study aims to examine whether shareholder M&A valuation depends on the legal and

institutional environment. We consider that two contrasting types of hypotheses may be

established and will later examine in our empirical analysis which of these predominates.

1) On the one hand, the “poorer” institutional environment of an acquired firm (low

minority shareholder protection, poor accounting standards, low creditor protection,

less developed capital markets, highly concentrated ownership, poor corruption

control) will determine a market with “less” active and “less” competitive corporate

control. In this environment, the likelihood of finding undervalued target firms

increases. Thus, bidder wealth appropriation will be valued positively by acquiring

shareholders (Rossi and Volpin, 2004; Starks and Wei, 2004; Hagendorff et al., 2007;

Bris and Cabolis, 2008; Martynova and Renneboog, 2008). Furthermore, the target

firm will adopt better corporate governance practices and will show greater degrees of

transparency and shareholder protection, which will allow the acquiring firm to pay a

lower price in the takeover (Starks and Wei, 2004; Bris and Cabolis, 2008; Martynova

and Renneboog, 2008).

2) On the other hand, target firms in a “poorer” legal and institutional environment may

generate problems and decrease the value of the M&A. Low minority shareholder

protection, poor accounting standards, higher ownership concentration, poor

corruption control, poor creditor protection and less developed capital markets hinder

acquisition negotiations and increase the risk of operating in these countries.

Therefore, a negative M&A valuation will be expected on the part of the acquiring

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shareholders (Dahlquist, Pinkowitz, Stulz and Williamson, 2003; Rossi and Volpin,

2004; Moeller and Schlingemann, 2005).

Furthermore, large shareholders, like families, may extract private benefits more easily from

minority shareholders, for example, after an M&A in legal environments with poor protection

for minority shareholders (Ben-Amar and André, 2006). Higher benefits of control would be

associated with less developed capital markets, more concentrated ownership and, in general,

a worse legal and institutional environment. In contrast, family ownership may positively

influence firm value in legal environments with greater minority shareholder protection

(Maury, 2006).

3. Database

The aim of this research study is to verify the previously expounded hypotheses and

arguments. In order to do so, we examine the database made up of listed European firms

which announced an M&A during the 2002-2004 period, with the target firm being listed or

unlisted in any country in the world, with or without the prior participation of the acquiring

firm or a subsidiary of another firm. We consider the different characteristics of the target

firms examined to be a contribution of this study, as other studies have been limited to a

specific geographical region or have not considered unlisted target firms.

We obtained our dataset from the Thomson One Banker Merger & Acquisitions Database,

DataStream, Lexis Nexis and Amadeus. Our sample meets the following criteria:

(i) Observations are made on all M&As announced by a European listed company for the

period 2002-2004 which have been completed to date; (ii) Both domestic and cross-border

transactions are considered; (iii) Target firms may be listed, private or a subsidiary of the

acquiring firm in any part of the world; (iv) The transaction involves a change in control.

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Of the 511 merger and acquisition operations initially identified, we eliminated those

transactions in which:

(i) The share price is not available in Datastream (175 operations). (ii) There are relevant

discrepancies regarding the announcement dates between Thomson One Banker and Lexis-

Nexis (27 operations). (iii) The acquiring firm announces more than one operation in the

event window, (-20, +20) (49 operations). (iv) There is no change in control in the acquired

firm (5 operations). (v) The beta parameter of the market model is not significant at the 95%

confidence level (79 operations).

The final sample of M&A announcements consists of 176 transactions involving firms from

25 countries, with a total market value of over US$ 2666.962 billion. Acquiring firms paid, on

average, US$ 661.37 million for target firms.

In order to classify firms as family or non-family, we checked ownership data in Thomson

One Banker, Lexis Nexis, the company annual report, the company website and the stock

exchange in the country of each firm. 33 firms do not have information about shareholder

structure available in any of those sources. The remaining 143 firms are classified as family

firms when the major shareholder is a family group or an individual, being non-family firms

otherwise. 45 firms are classified as family (31%) and 98 as non-family firms (61%).

3.1. Sample description

Table 1 shows M&A distribution according to the geographical area of both the acquiring and

target firm. 31.25% of all operations are carried out in the United Kingdom. Domestic

transactions in Sweden (6.81%) and France (6.25%) are also noteworthy.

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Table 1. Geographic distribution of the mergers and acquisitions Database: Thomson One Banker. Number of merger and acquisition operations for the 2002-2004 period in both the country of the acquiring firm (listed firms in Europe) and that of the target firm (listed and unlisted firms around the world).

+ 33 firms could not be classified, as family or non-family, due to the unavailability of their ownership data.

Table 2 shows the transaction distribution depending on whether the acquiring firm is a

family or non-family firm. Panel A refers to the characteristics of the transaction, according to

payment method, whether the M&A is hostile or friendly, whether the acquisition has the

same business focus or, to the contrary, represents a diversification, and whether it is

domestic or cross-border. Panel B classifies operations according to whether or not the target

firm lists on the market and the acquiring firm has had previous participation in the target

firm. We do not observe differences between family and non-family firms regarding the

percentage which each type of operation represents. 76% of the target firms do not list on the

Bidder country Total+ Family Non-family Target country Total

176 45 98 176 Austria 2 - 1 Austria 2 Belgium 2 1 1 Belgium 4 Denmark 1 - 1 Bermuda 1 Finland 6 - 5 Bulgaria 1 France 18 9 8 Canada 1

Germany 15 7 6 China 2 Greece 3 - 2 Demark 3 Ireland 4 1 2 Finland 8

Italy 6 - 5 France 13 Netherlands 3 1 2 Germany 14

Norway 8 - - Greece 2 Poland 1 - - India 1 Spain 6 6 - Ireland 5

Sweden 16 4 9 Italy 7 Switzerland 4 1 3 Japan 1

United Kingdom 81 14 49 Luxemburg 1 Netherlands 2 Norway 5 Poland 1 Portugal 1 Spain 4 Sweden 17 Switzerland 3 United Kingdom 60 United States 17

Domestic 109 29 56 Domestic 109 Cross-border 67 16 42 Cross-border 67

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market. Around 90% of the transactions do not imply previous bidder participation in the

target firm (non-subsidiary). 95% are friendly takeovers, while 59% represent acquisitions

with the same business focus. 43% of non-family firm M&As are cross-border transactions

versus 36% for family firm M&As.

Table 2. Transaction characteristics Number of M&As according to transaction characteristics of the target firm and according to whether the bidder is a family or non-family firm. Listed European acquiring firms, 2002-2004 period.

Table 3 includes the statistical descriptions for the entire M&A dataset, distinguishing

between family and non-family firms as well as between domestic and cross-border M&As.

The differences between family and non-family firms are not statistically significant. Neither

are they between domestic and cross-border operations, except for larger size in reference to

the target firm (transaction value, in millions of US dollars, divided by the acquiring firm

market value four weeks prior to the operation, in millions of US dollars), greater cash flow

availability and the greater weight of private target firms in domestic transactions.

Panel A: Transaction characteristics

Transactions Cash Equity Mixed Others Hostile Friendly Focus Diversif. Domestic Cross-

border Family 45 12 6 4 23 1 44 26 19 29 16 Non-Family 98 37 14 14 33 6 92 58 40 56 42 Total 143 49 20 18 56 7 136 84 59 85 58 Panel B: Target characteristics

Transactions Public Private Subsid. Non-

subsid. Family 45 10 35 2 43 Non-Family 98 25 73 9 89 Total 143 35 108 11 132

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Table 3. Descriptive Statistics Sample of 176 M&A announcements by European listed firms, target firms being listed and non-listed firms worldwide, for completed transactions between 2002 and 2004. We distinguish: 45 family firms, 98 non-family firms and 33 firms with unavailable ownership data. 109 are cross-border transactions and 67 are domestic. The table shows the average value (as percentage, or dollars for some variables), with the standard deviation below in parentheses. Non-parametric Mann-Whitney test of differences (p value).

All+ (N=176)

Family (N=45)

Non family (N= 98)

Difference Test (p value)

Cross-border

(N= 109)

Domestic (N= 67)

Difference Test (p value)

Panel A: Transaction Characteristics

Cash payment (%) 30 (0.46)

27 (0.44)

37 (0.48) (0.19) 30

(0.46) 30

(0.46) (0.95)

Equity payment (%) 15 (0.36)

13 (0.34)

14 (0.35) (0.88) 10

(0.31) 17

(0.38) (0.21)

Mixed payment (%) 15 (0.36)

8 (0.28)

14 (0.35) (0.37) 13

(0.34) 16

(0.36) (0.70)

Others means of payment (%)

40 (0.49)

51 (0.51)

34 (0.48) (0.06*) 47

(0.50) 37

(0.48) (0.21)

Friendly (%) 96 (0.21)

98 (0.14)

94 (0.24) (0.32) 96

(0.21) 95

(0.21) (0.97)

Tender offers (%) 15 (0.36)

13 (0.34)

18 (0.39) (0.46) 19

(0.40) 13

(0.34) (0.24)

Related businesses (%) 59 (0.49)

58 (0.50)

59 (0.50) (0.87) 64

(0.49) 56

(0.50) (0.28)

100% acquired (%) 94 (0.24)

98 (0.15)

91 (0.29) (0.13) 96

(0.21) 93

(0.26) (0.45)

Value of transactions (mil $)

661.37 (4736.75)

500.80 (2369.35)

814.46 (6082.63) (0.78) 414.46

(1956.10) 813.35

(5827.19) (0.95)

Relative size 1.25 (8.47)

1.32 (5.47)

1.43 (10.70) (0.21) 0.29

(1.39) 1.84

(10.68) (0.00)***

Panel B: Bidder Characteristics

Total assets (mil $) 12829 (69819.81)

13161.06 (61709.37)

13173.78 (79671.97) (0.12) 11462.14

(51413.04) 13673.41

(79315.95) (0.40)

Cash flow to total assets

3.89 (44.54)

0.33 (0.47)

6.55 (59.06) (0.92) 0.30

(0.41) 6.02

(56.22) (0.04)*

Market to Book 112.08 (1289.68)

390.30 (2548.39)

16.76 (67.71) (0.51) 292.03

(2104.04) 4.11

(17.23) (0.25)

Panel C: Target Characteristics

Public target (%) 24 (0.43)

22 (0.42)

26 (0.44) (0.67) 30

(0.46) 21

(0.41) (0.19)

Private target (%) 52 (0.50)

49 (0.51)

53 (0.50) (0.64) 43

(0.50) 57

(0.50) (0.08)*

Subsidiary target (%) 24 (0.42)

29 (0.46)

21 (0.41) (0.33) 27

(0.45) 22

(0.42) (0.47) + 33 firms could not be classified due to the unavailability of their ownership data. *,*** significant at the 10% and the 1% level.

Table 4 shows the number of operations in the database, classifying them in accordance with

the legal system of both the acquiring and target firm countries. Following La Porta et al.

(1998), we classify countries by the subsequent system: English (common law) and German,

Scandinavian, French, and communist (civil law). In the sample there is no transaction in a

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country with a communist legal system. The greatest number of operations takes place among

countries with the same legal system. Note should be taken of the number of transactions

carried out among firms pertaining to the English legal system (74 transactions out of the 176

which make up the sample), that is to say, those belonging a strong shareholder protection

environment.

Table 4. Sample distribution according to legal origin Number of transactions according to both bidder and target legal origin, following classification by La Porta et al. (1998).

Bidder Legal Origin Target Legal Origin English French German Scandinavian Total

Total (176) 85 35 23 33 176 English 74 5 4 2 85 French 4 28 3 2 37 German 6 2 14 1 23 Scandinavian 1 - 2 28 31 Same origin 144 Panel A: Family firm sub-sample (45) Total 15 17 8 5 45 English 14 3 3 - 20 French 1 13 1 - 15 German - 1 3 - 4 Scandinavian - - 1 5 6 Same origin 35 Panel B: Non-family firm sub-sample (98) Total 51 18 11 18 98 English 42 2 2 1 47 French 3 13 1 - 17 German 4 1 8 2 15 Scandinavian 2 2 - 15 19 Same origin 78

4. Acquiring firm shareholder valuation

We shall now examine the valuation that capital markets make of M&As, following the event

study methodology. We estimate abnormal returns at around the transaction announcement

date.

We obtain M&A announcement dates from Thomson One Banker and Lexis Nexis. We

calculate the abnormal return for each announcement (AR) in the event window (-20, +20) as

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the difference between daily returns and expected returns according to the market model,

estimated in the period (-200, -21) before the announcement date. Datastream provides the

daily return index for each firm, adjusted by dividends and splits. This return index allows

estimating daily return. We follow the method of Dodd and Warner (1983) and Corrado

(1989) for small sample size in order to verify the existence of significant daily abnormal

returns (AR) and cumulative abnormal returns (CAR).

Table 5 shows the cumulative average abnormal return (CAAR) for bidder firm shareholders

around the announcement of the M&A. The abnormal return for bidder firm shareholders on

the day of the merger or acquisition transaction announcement (t=0) is 0.30% for the entire set

of firms, 0.52% for family firms and is not statistically significant for non-family firms. The

results for the entire set of firms is consistent with Chang (1998), Fuller et al. (2002), Moeller

et al. (2004), Faccio et al. (2006), and Martynova and Renneboog (2006). In the interval

(-2,+2) the Cumulative Average Abnormal Return for the whole sample is 1.18%, 2.82% for

family firms and 0.92% for non-family firms, all cases being statistically significant.

Therefore, bidder firm shareholder valuation is positive for the entire set of public firms in

Europe. Acquiring family firm shareholders value the M&A more than non-family firm

shareholders. The CAARs obtained are similar to those obtained by Ben-Amar and André

(2006) for the Canadian market. These results support the hypothesis of family firm efficiency

in M&As (long-term objectives, greater ties to the future of the firm) as opposed to the

hypothesis of family shareholder opportunism (using M&As to obtain private benefits at the

expense of minority shareholders).

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Table 5. Cumulative Average Abnormal Return (CAAR) for the acquiring firm surrounding the M&A announcement Sample of 176 M&A announcements by European listed firms, target firms being, listed and unlisted firms worldwide, for completed transactions between 2002 and 2004. 45 family firms, 98 non-family firms, 33 firms with unavailable ownership data.

***, **, *: significant at the 1%, 5% and 10% level.

4.1. Bidder shareholder valuation according to transaction characteristics

In accordance with the aim of this paper, we will now analyze the valuation made by

shareholders in more detail. We examine the differences in said valuation, comparing family

and non-family firms, according to whether the target firm is public or private, and

discriminating by whether the transaction is domestic or cross-border and by method of

payment.

Table 6 shows the Cumulative Average Abnormal Return for bidder shareholders in (-2, +2).

The difference between the CAAR for family and non-family firms is not statistically

significant, as neither is the difference in the CAAR for domestic and cross-border M&As. As

regards the method of payment, and in accordance with other studies, the CAAR is positive,

1.25%, when the M&A is paid in cash and statistically different from the CAAR when the

Event window

CAAR % Total

Dodd & Warner

Test

Corrado Test

CAAR % Family

Dodd & Warner

Test

Corrado Test

CAAR % Non-Family

Dodd & Warner

Test

Corrado Test

0 0.30% 2.85*** 2.02** 0.52% 1.72* 0.68 0.12% 1.23 1.26 (-1,+1) 0.70% 3.68*** 2.58*** 1.38% 2.76*** 1.08 0.44% 1.44 1.32 (-2,+2) 1.18% 3.87*** 3.06*** 2.82% 3.22*** 2.57** 0.92% 1.99** 1.57 (-2,+4) 1.32% 3.32*** 2.30** 3.08% 2.89*** 1.95* 0.95% 1.65 1.24 (-4,+4) 1.37% 8.16*** 2.06** 3.28% 8.51*** 1.97* 0.73% 2.55** 0.79 (-5,+5) 0.65% 1.41 1.13 3.30% 2.77*** 1.56 -0.34% -0.72 -0.27

(-10,+10) 0.32% 1.23 0.94 4.81% 3.00*** 2.40** -1.41% -0.80 -0.58 (-20,+20) 4.37% 1.67 0.96 -0.39% 0.53 0.71

(-2,0) 0.74% 2.73*** 2.03** 1.24% 1.85* 1.59 0.52% 1.21 0.85 (-3,0) 0.56% 1.55 1.57 1.42% 1.95** 1.74* 0.09% -0.15 0.25 (-4,0) 0.79% 1.84* 1.61 1.45% 1.88* 1.57 0.30% 0.13 0.26 (-5,0) 0.34% 0.70 0.83 1.29% 1.67 1.05 -0.34% -1.18 -0.48 (-6,0) 0.66% 1.34 1.15 1.78% 1.88* 1.32 0.01% -0.52 -0.31 (-7,0) 0.50% 0.86 1 1.67% 1.68* 1.18 -0.09% -0.67 -0.02 (0,+2) 0.74% 3.91*** 3.06*** 2.10% 3.30*** 2.13** 0.52% 2.07** 1.81* (0,+3) 0.70% 3.34*** 2.1** 1.66% 2.74*** 1.38 0.55% 1.81* 1.34 (0,+4) 0.88% 3.08*** 2.05** 2.35% 2.69*** 1.39 0.55% 1.56 1.29 (0,+5) 0.61% 2.06** 1.29 2.53% 2.78*** 1.35 0.13% 0.70 0.56 (0,+6) 0.38% 1.70 0.94 2.59% 2.49** 1.01 -0.10% 0.22 0.34 (0,+7) 0.46% 2.02** 1 2.51% 2.43** 1.09 -0.07% 0.62 0.37

16

method of payment is through equity, being negative in this case, though not statistically

different from zero. The differences are also significant when the payment method is in cash

and the bidder is a private firm, 1.58%, versus a public firm (not statistically different from

zero).

Table 6. Cumulative Average Abnormal Return (CAAR) for the bidder firm according to firm and transaction characteristics Sample of 176 M&A announcements by European listed firms, target firms being, listed and unlisted firms worldwide, for completed transactions between 2002 and 2004. 45 family firms, 98 non-family firms, 33 firms with unavailable ownership data. The results of the Dodd and Warner T-test (1983) and the Corrado non-parametric test (1989) are included respectively in parentheses below the CAAR. The test for difference is the Mann-Whitney non-parametric test.

CAAR (-2,+2)

Domestic (N=109 )

Cross-border. (N=67 )

Difference (p value)

Cash (N=53 )

Equity (N=26)

Mixed (N=26)

Others (N=71)

Difference cash vs equity

Panel A: All (N=176)

CAAR (Dodd-Warner)

(Corrado)

1.18% (3.87***) (3.06***)

1.22% (3.68***) (2.64***)

1.11% (1.57) (1.57)

(p=0.67) 1.25%

(3.11***)(1.89*)

-1.84% a

(0.04)

1.45% a

(2.08**)

2.13% (2.98***) (2.06**)

(p=0.09*)

Panel B: Family vs non-family

Family (N=45)

2.82% (3.22***) (2.57**)

3.21% a

(2.42**)

2.12% a

(1.34) (p=0.60)

2.50% a

(1.19)

4.63% a

(1.51)

-1.03% a

(0.36)

3.19% a

(1.92*) (p=0.57)

Non-family (N=98)

0.92% (1.99**) (1.56)

0.88% (1.52) (1.15)

0.98% (1.28) (1.08)

(p=0.88) 0.71% (1.38) (1.02)

-0.24% a

(0.49)

1.20% a

(0.47)

1.53% (1.72*) (1.23)

(p=0.27)

Difference (p value) (p=0.20) (p=0.23) (p=0.64) (p=0.81) (p=0.22) (p=0.60) (p=0.50)

Panel C: Public vs private target

Public (N=43)

0.88% (0.78) (1.48)

1.42% a

(1.06)

0.25% a

(1.11) (p=0.75)

0.341% a

(0.41)

0.45% a

(1.27)

-0.17% a

(0.67)

1.94% a

(0.80) (p=0.81)

Private (N =133)

1.28% (4.01***) (2.73***)

1.17% (3.77***) (2.57**)

1.47% (1.64) (1.16)

(p=0.76) 1.58%

(3.29***)(2.07**)

-3.27% a

(-0.95)

1.75% a

(1.83*)

2.18% (2.90***) (1.81*)

(p=0.04**)

Difference (p value) (p=0.64) (p=0.83) (p=0.86) (p=0.51) (p=0.32) (p=0.36) (p=0.99)

***, **, *: significant at the 1%, 5% and 10% level. a: the results are not shown due to the reduced size of the sub-sample.

4.2. Cross-border transaction valuation according to differences in the institutional

environment

In this section we contemplate the analysis of cross-border transactions, considering the

characteristics of the legal and institutional environment of both the acquiring and the target

17

firm. The variables which we take into consideration for each country are the following:

shareholder protection, accounting standards, corruption control, ownership concentration,

GDP per capita and creditor protection.

a) The degree of shareholder protection (PSHAREHOLDER). We define this following

Rossi and Volpin (2004) and Hagendorff et al. (2007) and multiply the revised anti-

director index (La Porta et al., 2008) by a measure of the rule of law which rates the

law-and-order tradition (Kaufmann, Kraay and Mastruzzi, 2007).

b) The quality of accounting standards (ACCOUNT). We use the index from the Center

for International Financial Analysis and Research (La Porta et al., 1999, 2000).

c) Economic development (GDPpc). We consider the gross domestic product per capita

for each country and year (at constant prices from the year 2000), obtained from the

World Economic Outlook (International Monetary Fund).

d) Ownership concentration (OWNCONC) in each country. Calculated by La Porta et al.

(1998) as the average of the participation of the three major shareholders in the ten

largest, privately-owned, non-financial firms in each country.

e) Corruption control (CCORR). Variable defined by Kaufmann, et al. (2007) for the

control which a country’s political system exercises to avoid distortions in the

economic and financial environment, inefficiency in government and business, and

instability in the political processes which obstruct foreign investment.

f) Creditor protection (PCREDITOR). We multiply the creditor rights index defined by

Djankov, McLiesh and Shleifer (2003), proxy for the possibility of debt financing, by

the measure of legal efficiency (rule of law ).

Table 7 shows the Cumulative Average Abnormal Return for bidder shareholders according

to the differences between the respective institutional environments of the acquiring and the

18

target firm. This univariate analysis only obtains significant cumulative returns for domestic

transactions or between firms from countries with the same legal and institutional

environment. Neither do we observe significant differences when we compare family and

non-family cumulative returns. However, before reaching any conclusions, in the following

section we will carry out a multivariate analysis, which will allow us to take all the possible

determinants into consideration as a whole.

Table 7. Cumulative Average Abnormal Return (CAAR) (-2,+2) for the acquiring firm, according to the differences in the legal and institutional environment Sample of 176 M&A announcements by European listed firms, target firms being, listed and unlisted firms worldwide, for completed transactions between 2002 and 2004. The results of the Dodd and Warner T-test (1983) and the Corrado non-parametric test (1989) are included respectively in parentheses below the CAAR. The test for difference is the Mann-Whitney non-parametric test. Panel A :Shareholder protection

Greater in bidder country (1) Equal (2) Less in bidder country (3) (1)-(2) (2)-(3) (1)-(3) 0.79% (0.80) (0.59)

(N=46)

1.22% (3.69***) (2.69***) (N=110)

1.85% a

(2.00*) (N=20)

(p=0.41) (p=0.67) (p=0.14)

Panel B: Accounting Standards Higher in bidder country (1) Equal (2) Lower in bidder country (3) (1)-(2) (2)-(3) (1)-(3)

1.32% (2.16**)

(1.68) (N=45)

1.36% (3.83***) (2.81***) (N=111)

-0.13% (-0.78) (-0.08) (N=20)

(p=0.92) (p=0.19) (p=0.16)

Panel C :GDP per capita Higher in bidder country (1) Equal (2) Lower in bidder country (3) (1)-(2) (2)-(3) (1)-(3)

2.45% a

(1.91*) (N=30)

1.21% (3.69***) (2.69***) (N=110)

-0.12% (-0.29) (0.09)

(N=35)

(p=0.44) (p=0.16) (p=0.06*)

Panel D: Ownership concentration Greater in bidder country (1) Equal (2) Less in bidder country (3) (1)-(2) (2)-(3) (1)-(3)

0.78% a

(0.65) (N=24)

1.30% (3.90***) (2.90***) (N=109)

1.58% (1.95*) (1.79)

(N=38)

(p=0.28) (p=0.95) (p=0.28)

Panel E: Corruption control Greater in bidder country (1) Equal (2) Less in bidder country (3) (1)-(2) (2)-(3) (1)-(3)

0.78% a

(0.65) (N=24)

1.30% (3.90***) (2.90***) (N=109)

1.58% (1.95*) (1.79)

(N=38)

(p=0.28) (p=0.95) (p=0.28)

Panel F: Creditor protection Greater in bidder country (1) Equal (2) Less in bidder country (3) (1)-(2) (2)-(3) (1)-(3)

0.61% (0.79) (0.87)

(N=43)

1.22% (3.69***) (2.69***) (N=110)

2.05% a

(1.52) (N=23)

(p=0.46) (p=0.84) (p=0.34)

*, **, ***: statistically significant at the 90%, 95 % and 99 % confidence level, respectively. a: the results are not shown due to the reduced size of the sub-sample.

19

5. Determinants of bidder abnormal returns

After the above univariate analysis, in this section we will carry out a multivariate analysis

which allows us to test the determinants of the acquiring-firm shareholders’ valuation of the

M&A announcement as a whole. Besides considering transaction and firm characteristics, we

will also examine the influence of the family nature of the acquiring firms, as well as the legal

and institutional environment of both the acquiring and the target firm.

5.1. Explanatory model of the acquiring-firm shareholders’ valuation

The specification of the model to test the hypothesis is as follows:

jiiiiiji INSTIFAMILYXINSTIFAMILYCAR ,43210, * εααααα +++++=

The dependent variable (CARi) is the estimated 5-day (-2,+2) cumulative abnormal return of

acquiring European firms around the announcement date of a transaction.

Family (FAMILY) is a dummy variable taking the value of one when an individual or family

is the major shareholder, or zero otherwise.

Ownership (OWNER) is the percentage of shares held by the majority shareholder.

Ownership2 (OWNER2) is the square of ownership.

The INSTI variable groups together variables concerning the legal and institutional

environment characteristics of both the acquiring and the target firm, as defined in the

preceding section. The explanatory variables are defined as the difference in each

characteristic between the acquiring and the target firm4: Shareholder protection

(DFSHAREHOLDERBT), Accounting standards (DFACCOUNTBT), Economic development

4 We also consider the variable for the acquiring and the target firm separately. However, the results are not significant in this case.

20

(DFGDPBT), Ownership concentration (DFOWNCONCBT), Corruption control

(DFCCORRBT), and Creditor protection (DFCREDITORBT).

The FAMILY*INST variable reflects the interaction between family ownership and the

characteristics of the legal and institutional environment. In accordance with the previous

hypotheses, we expect that a “better” legal environment in the bidder country, when the

bidder is a family firm, will positively affect the acquiring-firm shareholders’ valuation.

The Xi variable is a variable vector which incorporates both firm and transaction

characteristics and includes the following variables, defined as dichotomous variables:

Method of payment (CASH), which has a value of 1 if financing is exclusively in cash; Bidder

attitude regarding the takeover (FRIEND), which has a value of 1 if friendly; Focus activity

(FOCUS), which has a value of 1 if the main line of business for both firms is the same, two

digits of the SIC code; Cross-border transactions (CROSS), which has a value of 1 if the

transaction is cross-border; Acquiring firm size (SIZE), which has a value of 1 if the firm falls

within the first quartile of market capitalization at the end of the semester prior to the

transaction announcement; Target firm listing (LISTED), which has a value of 1 if the target

firm lists on the market; Managerial opportunism (CFLOW), defined as cash flow between

all acquiring firm assets; Growth opportunities (MB), approximated as the market-to-book

ratio of the acquiring firm; and Relative size of the acquired firm (RSIZE), calculated as a

logarithm of the value of the transaction divided by the market value of the acquiring firm

four days before the transaction.

5.2. Results: determinants of the acquiring-firm shareholders’ valuation

In this section we develop the cross-sectional regression analysis to examine the impact of

family ownership on bidder abnormal return, considering the influence of the legal and

institutional environment, as well as firm and transaction characteristics, as control variables.

21

The dependent variable is the cumulative abnormal return (-2, +2) for bidder shareholders at

announcement. The explanatory variables are those described in the previous section.

Table 8 shows the results of the regression analysis. The fact that the acquiring firm is a

family firm has a positive and significant effect on the valuation made by bidder shareholders

(models 1, 4, 5). This result is consistent with the “family firm efficiency in M&As”

hypothesis that we established previously. The long-term perspective of family firms and their

lesser degree of manager-shareholder agency conflicts are in accordance with this result.

Shareholders do no perceive families as using M&As to obtain private benefits at the expense

of minority shareholders, contrary to the “family firm opportunism in M&As” hypothesis.

We also find a non-monotonic relationship between the level of ownership concentration and

acquiring firm abnormal returns. The ownership2 variable has an expected negative and

significant sign (Model 2). At higher concentrations of ownership by large shareholders, the

relationship becomes negative (the entrenchment effect becomes dominant).The high

correlation between family and ownership variables causes said variables to lose significance

in Model 3.

Among the classic explanatory variables, the following results are significant: the fact of

being a friendly takeover (FRIEND), which has a positive effect, and the existence of

investment opportunities (MB), which has a negative effect, consistent with Moeller et al.

(2004).

The positive effect of the family variable is maintained when we incorporate the variables for

the legal and institutional environment of both the acquiring and the target firm, as well as

their difference (Table 8 shows the estimates defining institutional variables as differences

between the environment of the bidder and that of the target firm). Among the institutional

variables, only the difference in corruption control between the countries of the firms

22

involved in the M&A is significant. This result is consistent with the possibility of

shareholder wealth expropriation in the target firm country. The high correlation between the

institutional variables and the family variable leads us to verify the significance of the

interaction variable between both sets of variables (Table 9).

Table 8. Determinants of Bidder Abnormal Returns: Family Ownership Least squares regressions. Dependent variable: cumulative abnormal return in the event window (-2,+2). Explanatory variables: family ownership, legal and institutional environment, and control variables. The sample consists of 124 M&A announcements by European listed firms (2002-2004).

*, **, ***: statistically significant at the 90%, 95 % and 99 % confidence level, respectively.

Table 9 reports the interaction between family and legal and institutional characteristics of the

bidder country. We separately estimate 6 models, given the high correlation between the

variables. When the bidder is a family firm, we observe a positive effect in the bidder

shareholder valuation when its legal and institutional environment offers greater shareholder

protection (Model 1), better accounting standards (Model 2), financial development (GDP)

(Model 3) and corruption control (Model 5). In these environments, management-shareholder

and majority-minority shareholder agency conflicts are less serious. Likewise, there is less

(1) (2) (3) (4) (5) FAMILY 0.0237* 0.0231 0.0250* 0.0250* OWNER 0.0017 0.0013 OWNER2 -0.0000* -0.0000 CASH 0.0143 0.0129 0.0147 0.0141 0.0146 FRIEND 0.0467** 0.0531** 0.0480** 0.0462** 0.0459** FOCUS 0.0156 0.0131 0.0164 0.0146 0.0149 CROSS-BORDER -0.0019 -0.0073 0.0003 CFLOW -0.0000 -0.0000 -0.0000 -0.0000 -0.0000 MB -0.0000*** -0.0000*** -0.0000*** -0.0000*** -0.0000*** SIZE 0.0514 0.0539 0.0565 0.0504 0.0512 RSIZE 0.0024 0.0030 0.0025 0.0026 0.0028 LISTED -0.0069 -0.0074 -0.0078 -0.0064 -0.0058 DFPSHAREHOLDER BT 0.0013 DFACCOUNT BT DFGDP pcBT DFOWNCONC BT DFCCORRBT 0.0104* DFPCREDITOR BT YEARS YES YES YES YES YES

Observations 124 124 124 124 124 Prob>F 0.0000 0.0000 0.0000 0.0000 0.0000

R-square 0.1426 0.1324 0.1565 0.1441 0.1486

23

operational risk in said environments. These results are consistent with the positive influence

of family ownership in legal environments with better minority shareholder protection

(Maury, 2006).

Table 9. Regression: Bidder Abnormal Returns and Family Ownership Least squares regressions. Dependent variable: cumulative abnormal return in the event window (-2,+2). Explanatory variables: family ownership, legal and institutional environment, and control variables. The sample consists of 124 M&A announcements by European listed firms (2002-2004).

*, **, ***: statistically significant at the 90%, 95 % and 99 % confidence level, respectively.

We do not observe any differences in the results for other event windows of the cumulative

abnormal return or for alternative definitions of legal and institutional environment variables

(such as dummies).

6. Conclusions

This study explores the influence of family ownership on the abnormal return of European

bidder firms, taking into account the legal environment of the acquiring firm and the possible

differences with that of the country of the target firm.

(1) (2) (3) (4) (5) (6) FAMILY*PSHAREHOLDER 0.0038* FAMILY*ACCOUNT 0.0003* FAMILY*GDP 0.0000* FAMILY*OWNCONC 0.0452 FAMILY*CCORR 0.0122* FAMILY*PCREDITOR 0.0040 CASH 0.01315 0.0156 0.0146 0.0129 0.0134 0.0093 FRIEND 0.0478** 0.0440** 0.0467** 0.0465** 0.0474** 0.0505** FOCUS 0.0156 0.0157 0.0158 0.0137 0.0152 0.0138 CFLOW -0.0000 -0.0000 -0.0000 -0.0000* -0.0000 -0.0000** MB -0.0000*** -0.0000*** -0.0000*** -0.0000*** -0.0000*** -0.0000*** SIZE 0.0517 0.0470 0.0502 0.0491 0.0515 0.0503 RSIZE 0.0024 0.0016 0.0024 0.0025 0.0025 0.0024 LISTED -0.0055 -0.0080 -0.0071 -0.0086 -0.0071 -0.0059 YEARS YES YES YES YES YES YES

Observations 124 120 124 123 124 123 Prob>F 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000

R-square 0.1487 0.1414 0.1430 0.1199 0.1401 0.1281

24

The sample includes M&As announced by European listed firms throughout 2002-2004.

Target firms are listed and unlisted firms worldwide. This is a broader sample in comparison

to other research studies. Another contribution of this paper is the analysis of cross-border

M&As, considering legal and institutional environment characteristics in relation to

shareholder protection, accounting standards, financial development, ownership

concentration, corruption control and creditor protection.

Family firm control may impose costs on minority shareholders, such as tunneling earnings or

favoring sub-optimal investments. However, family ownership may enhance long-term

strategies and diminish agency conflicts between shareholders and management. Our results

are in accordance with a positive influence of family ownership on acquiring shareholder

valuation of M&A announcements. Cumulative Average Abnormal Return, in (-2,+2), is

1.18% for the whole sample, 2.82% for family firms and 0.92% for non-family firms.

Multivariate Analysis, considering legal and institutional environment characteristics, also

shows that family ownership is a positive factor in bidder shareholder M&A valuation in

environments with greater shareholder protection, better accounting standards, more financial

development (GDP) and better corruption control.

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