Academic journal article Journal of Economics and Finance

Acquisitions of Family Owned Firms: Boon or Bust?

Academic journal article Journal of Economics and Finance

Acquisitions of Family Owned Firms: Boon or Bust?

Article excerpt

1 Introduction

The family owned firm has historically been the most prevalent form of enterprise in the United States, comprising, according to the Family Business Forum (Accessed at http://www.fdu.edu/academic/rothman/fambusfor.htm), 78% of all new jobs created and 90% of all businesses in the United States. A study by the American Management Association finds that fewer than 30% of family businesses survive into the second generation, 10% to the third and only 4% operate at the fourth generation and above (Prachyakom 2010). Accordingly, we focus on the sale of 307 family businesses by either the founder or by subsequent generations and investigate the returns to the bidders when these family-owned firms are acquired. Our unique, hand-collected dataset allows an in-depth insight into the characteristics of the deal, such as the age of the family firm, ownership levels, method of payment, and generational distance between the founder and current family-manager.

The literature reveals opposing conclusions pertaining to ownership structure and firm value. According to traditional agency theory, an alignment of interests should exist in a family owned business, which should presumably lead to superior firm performance (Jensen and Meckling 1976; Fama and Jensen 1983; Stulz 1988). Other research focuses on entrenchment issues (McConnell and Servaes 1990; Slovin and Sushka 1993), and still others such as Chang (1998) and Fuller et al. (2002) focus on returns to shareholders when private firms are acquired.

We extend the literature by focusing on the acquirers of family firms, both public and privately held. In the case of alignment of interests, any change in family interest via a merger could negatively impact firm value. Alternately, a family owned firm could have an entrenched family that is detrimental to firm value. In these cases, any change in ownership structure should alleviate this entrenchment problem, resulting in a higher firm value.

While earlier studies generally show that bidders experience negative, or at best, insignificant gains (Jensen and Ruback 1983; Weston et al. 2001; Mulherin and Boone 2000), we find that bidders do have positive announcement abnormal returns from the acquisition at the high and medium levels of family ownership. However, bidder returns are negatively impacted when acquiring a public target family firm, even controlling for the percent owned by the family. Thus, bidder gains can be explained for the high levels of family ownership where not many of the targets are publicly traded and where information asymmetry and entrenchment are likely to be very high. However, using the Fama-French three factor model, long run returns are significantly and largely negative, suggesting that the absorption of family firms is not easily accomplished.

The remainder of the paper is organized as follows. We review the related literature and form hypotheses in Section 2 while Section 3 describes our data and methodology. Section 4 reports our results and interpretations, and Section 5 summarizes and concludes the paper.

2 Review of the literature and hypotheses

2.1 Acquisition announcement returns

The majority of the literature finds negative or at best insignificant abnormal announcement returns for acquirers (Roll 1986; Jensen 1986; Morck et al. 1990). For studies dealing with our time period, Weston et al. (2001), Schwert (1996), Mulherin and Boone (2000) and Swanstrom (2006) all find negative returns. On the other hand, there has been some evidence of positive announcement returns for acquiring firms. Chang (1998) argues that competition for private targets may be limited due to the difficulty of obtaining information on these targets, and correspondingly high search costs. Fuller et al. (2002) call this the liquidity effect, where private firms cannot be bought or sold as effortlessly as public firms. A similar argument could be made for family owned firms. …

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