Family Firms M&A Announcements and Their Effect on Stock Market Reactions

What is interesting, is that cash payment factor negatively correlates with family business. It supports ideas of Ghosh and Ruland, who argues that stock payment is the key factor for family, since this is the only way for them to safe their board positions. Moreover, as we consider family business as the risk-averse agent, the fact that the deal will be done during crisis times or on cross-border basis will be followed by negative family respond.

Table 4. Correlation Table

Source: Author's calculations

3.2 Empirical results

In Table 5 given below we can see empirical results for the 8 models. Breusch-Pagan/ Cook-Weisberg test for heteroskedasticity rejected the null hypothesis of constant variance at 1% level of significance (chi2(1) = 3742.99). Which means that there is a heteroscedasticity in our model. To confirm the assumption of heteroscedasticity, a White test was also performed, where Ho: homoscedasticity against Ha: unrestricted heteroscedasticity. Cameron & Trivedi's decomposition of IM-test shown that with chi2(30) =81.37 at 1% significance level the variance in non-constant. So, in order to understand the significance of explanatory variables, we will use robust standard errors (which are in round brackets in Table 5).

Moreover, Durbin-Watson test on autocorrelation was made, and with critical d-statistic (8,1099) = 1.962565, which is greater than dL=1,53 and greater than dU=1,76. So, there is no statistical evidence that the error terms are positively or negatively autocorrelated.

Furthermore, VIF (variance inflating factors) analysis showed that there is no multicollinearity as mean VIF is 1.05 with the factors did not exceed 2. It means that overall predictive value of the model is satisfactory, and we should not drop any of the variables. The same idea is followed by R² adjusted, as it falls every time the explanatory variable drop arises. It means that each of X's explains model properly. F-tests for each model ware made. The null hypothesis in all models were rejected.

Table 5. Empirical Results with Robust s.e.

Source: Author's calculations

As we can see from the table, in all models cross-border factor negatively reacts the announcement period abnormal returns, which in fact, supports the findings of Moeller (2005), explaining the negative sign as a product of problems arising by acquiring foreign companies. This factor becomes significan at 0.1% significance level for the models 4 to 8. It can be noted that differences in exchange rates, tax and legal regimes, as well as economic distance between countries can adversely affect the excess return for shareholders of the company-buyer.

Moreover, cash payment approach also negatively affects the dependent variable and significant, again at 0.1%, for all models in which it is used. This contradicts with our initial hypothesis that market will react positively on cash purchase since if the payment will be done using stock or other instruments, family managers will save their positions. So, in order to have higher short-term abnormal returns it is crutial for the acquirer to act in target's interests. Free cash flow to Book value have relatively small, but negative effect on abnormal returns. It supports the ideas of Jensen (1986): the higher FCF the lower the abnormal returns. However, it is not significant at even 5% level. According to the rule of informational criteria, the lover the ic, the better is model, therefore, comparing Model-1 and Model-2 we should include this variable.

What was surprising, is that despite the fact that only 35% of purchases in sample were made in order to diversify portfolio, the Same_ind variable is significant at 5% level for the models 2,3 and 4. The positive sign of the variable shows that if acquirer is willing to buy company in the same sector, the market will react positively, which in fact counter the assumption that conglomerate mergers are more preferable since financial risks decreased and overall demand-supply framework is simplified. Maybe, it is more preferable for the acquirer since it is much more beneficial for the industry and especial for the stakeholders, but in my sample, the numbers show the reversed logic where market will react positively.

Nontheless, the fact that the firm is managed by the family is crutial for all models at at least 5% significance level. This fact is one of the most important result of the model: there is a positive reaction of the market if company is family one, so there will be abnormal returns during announcement period. Moreover, as is was assumed initially, the smaller the relative size of the company, the grerater the announcement period abnormal return. Relative_size variable is significant at 1% significance level for the all models in which it was used.

Crisis and Hostlie variables are insignificant at 5% level. This means that this variables have bad explanatory nature in case of announcement period abnormal return. It means that my previous assumption that crisis plays important role is rejected and that results considering this question is still mixed.

Overall, the models works perfectly since all signs are constant. Family ownership factor is significant for each regression, R² adjusted falls when we eliminate each explanatory variable. So, the first hypotheses was not rejected. A the same time H2 and H3 were rejected, which means that cross-border deals and conglomerate takeovers negatively affects short-term abnormal returns. It can be explained by the willingness of stakeholders to decrease risks arising from the new grounds of business, especially if its family one. Despite the problems which can arise in inner management of the firm, new country or new industry may create some negative effects which will overwhelms positive ones arising from diversification.

Conclusion

family firm cash flow

Mergers and acquisitions in modern conditions are very important. M&A is a tool for implementing the company's strategic plans. The rejection of the evolutionary mode of development using only internal capabilities and resources in favor of the revolutionary process - corporate integration - is caused by the need to respond to the changing market environment, outpacing the development of competitors. The acquisition of competitive advantages in the face of integration partners, their resources and capabilities, as well as the company's potential will contribute to the effective work in the current difficult financial crisis conditions.

By adjustment of family business to the model and taking into considerations previous findings in this area, we concluded that this factor have positive effect on the wealth creation of M&A. Given the long-term involvement of the firm and their better understanding of the business, market abnormal returns are higher when the firm is owned and managed my the one family. Nonetheless, the fact that the family management is interested only in conglomerate mergers actually negatively affects short-term financial market profits. The possible argument for this case is fear of existing stakeholders of new areas of business and specific issues arising from M&A. The same logic was presented in case of cross-border deals. Confirming the ideas of previous findings, foreign target adverse for the acquirer's shareholders. New territory may blow up the target's economy, increase productivity and bring good money to the company, but the legislative problems, the difference in rates and requirements, the uncontrolled performance outweigh all the positive aspects of the deal.

Relative size of the deal and payment method also beome significant variables in explaining the abnormal returns. Despite the arguments supporting the idea that the greater size of the acquirer in comparisson to target then the lower will be returns, our model has shown inverse results. Cash payment was also negatively met by the market. One of the possible reasons for that is because cash payment in most cases means the replacement of the current management of the company, which in case of family firm means the dismissal of specialists who are well versed in their business and region, which is potentially more attractive for shareholders. Nevertheless, I believe that in practice it works in the opposite direction. Family businesses are very risk-averse, which makes them incapable of modern investments and the adoption of new technologies. In addition, the fact that the next generation is burdened with working for their parent means that managers and employees are not always highly qualified specialists in the field, which also slows down or even stops growth. Replacing the current management with specialists will give a dawn to the company, so I believe that in fact there needs to be a deeper study of the target management structure and that in fact, the profit-maximizing shareholders should have a positive effect to the cash payment.

Finally, the initial assumption that the crisis has a negative effect on short-term incomes was confirmed, but again I believe that this issue requires further study, since there are more jobs in which the fact of 2007 higher percent is greater than those that reject it. In addition, in my model, the variable explaining the crisis turned out to be insignificant at all, which tells us about its non-involvement in the explanation of income.

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Appendix 1

Table representing Empirical Results without Robust s.e.

Source: Author's calculations

Appendix 2

Breusch-Pegan test on Heteroscedasticity

Source: Author's calculations

Appendix 3

White and Cameron&Triverdi's tests on Heteroscedasticity

Source: Author's calculations

Appendix 4

VIF test on Heteroscedasticity

Source: Author's calculations

Appendix 5

F-test for the Model-1

Source: Author's calculations

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