Family firms and the stock market performance of acquisitions and divestitures

Abstract

Research Summary This paper explores the stock market performance of acquisitions and divestitures where both, one, or neither of the companies in the transaction are family firms. We find that acquirer shareholder returns are highest when family firms buy businesses from non‐family firm divesters, especially when family chief executive officer (CEO) acquirers buy businesses from non‐family CEO divesters. Additionally, divester shareholder returns are highest when family firms sell businesses to non‐family firm acquirers, especially when family CEO divesters sell businesses to non‐family CEO acquirers. These findings reveal that it is important to consider the characteristics of both the acquiring and divesting firms when analyzing acquisition and divestiture performance, and that the expected gains to family firm acquisitions and divestitures are driven by transactions in which the counterparties are non‐family firms. Managerial Summary This paper explores how investors react to acquisitions and divestitures where both, one, or neither of the companies in the deal are family firms. The stock market performance of acquiring firms is highest when family firms buy businesses from non‐family firms, relative to the other three possible combinations of family and non‐family firm acquirers and divesters. Likewise, the stock market performance of divesting firms is highest when family firms sell businesses to non‐family firms, again relative to the other three possible combinations of family and non‐family acquirers and divesters. These findings suggest that investors take into consideration the identities of both the acquiring and divesting firms when evaluating acquisitions and divestitures, and that this has significant implications for the expected performance gains of these transactions.

Ownership Structure and Firm Performance

“…Some of the measures to identify firm performance utilized profitability ratios however, all were consistent with the idea of considering preferred managerial shareholding as part of ownership structure. Feldman et al, (2019) explored the non-linear relationship between managerial ownership and firm profitability. By taking sample data of more than 350 firms for one year using linear regression, they found a positive relationship between ownership structure and Tobin's Q for board ownership of between 0 to 5% and more than 25% respectively and a negative relationship for board ownership of between 5 to 25%.…”

Divestiture strategy, CEO power and firm performance

“…However, their findings are similar to Haynes et al (2002), whereas the divestiture strategy has a positive association with firm performance. The findings from Feldman et al (2019) confirm it by revealing the increased stock performance of those firms with divestiture strategy. Lee and Toh (2020) address divestiture strategy as the factor in increasing the firm innovation performance.…”

Sustaining the Family Business through Open Innovation: The Role of Technological Acquisitions in Shareholder Value Creation

“…Following existing literature [66,[68][69][70], family business is defined as a firm in which the founder or the members of the founding family strongly influence corporate decision making. Although a broad definition may allow us to better reflect on the reality that founding families can exert influence in the firm in many non-mutually exclusive ways [71], I adopt a relatively conservative cutoff criterion of 5 percent for family ownership to define a family business with controlling family control [32,69,72]. Thus, a family business is a firm in which members of the founding family serve either as an officer, director, or blockholder with more than 5 percent ownership.…”