Ownership structure and operating performance of acquiring firms: The case of English-origin countries

Abstract

This paper provides empirical evidence on the relation between concentrated ownership and the long term operating performance of acquiring firms. We investigate the performance around 287 takeovers in English-origin countries other than the US by following the classification of La Porta et al. ]. Our principal finding is that the relationship between concentrated ownership and the level and change in operating cash flow returns after takeovers is non-linear. Value creating deals are associated with higher levels of concentration consistent with decreasing agency costs as the dominant shareholder's wealth invested in the acquiring firm increases. We also find, although all acquiring firms are from English-origin countries, that greater investor protection, as measured by the updated anti-director rights index in Djankov et al. [Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2006). The law and economics of self-dealing. Working Paper], has a positive impact on operating performance from acquisitions. We do not find a link between performance and their new anti-self-dealing index.

Does ownership concentration improve M&A outcomes in emerging markets?

“…We hypothesise that concentration of ownership in the hands of insiders will ameliorate agency conflict between managers and owners, and therefore have a positive impact on post-M&A firm performance, either because the insiders will then have a greater incentive to monitor the managers or, as is more likely in the context of India, these insiders themselves will then be involved in making strategic and managerial decisions for the firms. Our analysis extends that of Yen and Andre (2007), and complements the growing literature on the relationship between management ownership and firm value in emerging market economies, which indicates that a firm's value may be positively affected by concentration of ownership in the hands of insider-managers (Ryu and Yoo, 2011).…”

“…In the Indian context, there is evidence to suggest that these thresholds matter such that it is important to use such dummy variables rather than continuous measures of ownership (for details, see Bhaumik et al, 2010). The use of dummies is also consistent with the wider literature (Yen and Andre, 2007). If ownership concentration and the consequent reduction in Type 1 agency conflict improve the likelihood of success of M&As, the coefficients of the interactions between the MERGER dummy and these ownership variables (especially the one corresponding to greater than 50% ownership) should be positive.…”

“…A cautious interpretation of the more reliable regression results for the 2001-2004 period is that while ownership concentration may reduce Agency Problem I (between managers and owners), it may increase Agency Problem II (between large or majority and small or minority shareholders), such that ownership concentration in the hands of insiders may not necessarily improve M&A outcomes. This interpretation, which is reasonable for a context with low quality of corporate governance, is inconsistent with the limited evidence (almost entirely from developed countries) about the impact of ownership concentration on M&A outcomes (Yen and Andre, 2007), and with the evidence about the relationship between ownership concentration and firm value (Ryu and Yoo, 2011). However, it is consistent with the view of Fan et al (2011) that emerging market firms may be fundamentally different from developed country firms, such that firm characteristics such as ownership concentration may have quite different implications for these two types of firms.…”

The Effect of Innovativeness on the Relationship Between Diversification and Slack

“…Earlier researches (i.e. Yen and Andre, 2007) have also provided some reasonable arguments for negative correlations between diversification and control. They mainly implicitly implied that the higher the business units may put the corporate parent at a disadva tage position to uncover slack.…”

“…Besides, following Galbraith model, the presence of budgetary slack is just a conscious strategy of the corporate to reduce information processing at the top. More budgetary slack reduces the chance of missing the budget target, and therefore less dispersions that need to be scrutinized (Yen and Andre, 2007).…”