Family Firms and High Technology Mergers and Acquisitions

J Manag Gov (2014) 18:129158
DOI 10.1007/s10997-012-9221-x
Family firms and high technology Mergers &

Acquisitions
Paul Andre Walid Ben-Amar Samir Saadi
Published online: 11 May 2012

Springer Science+Business Media, LLC. 2012
Abstract We examine whether family firms undertake value creating high technology M&A. We also examine whether level of ownership, diversification, agency
issues and CEO type matter. Our sample consists of high-technology M&A
undertaken by Canadian firms over the period 19972006. Canada offers a setting
with many family firms and the use of control enhancing mechanisms such as dual
class shares and pyramid structures. We find a positive relationship between family
ownership and announcement period abnormal returns. This relationship, however,
starts to decrease at higher levels of ownership but remains overall positive. We also
show that the agency conflict between shareholders and professional managers has a
detrimental impact on announcement period abnormal returns whereas the conflict
between controlling and minority shareholders via control enhancing mechanisms
does not. Finally, we document that founder CEO undertake better high tech M&A
than descendant or hired CEO.
Keywords Family firms Family ownership Mergers & Acquisitions
Corporate governance Control enhancing mechanisms High-technology
firms Event studies
JEL Classification
G14 G34
P. Andre (&)
ESSEC Business School, Av. Bernard Hirsch, B.P. 50105, 95021 Cergy, France
e-mail: andre@essec.fr
W. Ben-Amar
Telfer School of Management, University of Ottawa, 55 Laurier East,
Ottawa, ON K1N 6N5, Canada
e-mail: benamar@telfer.uottawa.ca
S. Saadi
Queens School of Business, Queens University, Kingston, ON K7L 3N6, Canada
e-mail: ssaadi@business.queensu.ca
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1 Introduction
There is a substantial amount of evidence showing that family firms represent a
large fraction of public and private firms around the world (e.g. Claessens et al.
2000; Faccio and Lang 2002; Pedersen and Thomsen 2003; Anderson and Reeb
2003a). However, there exists considerable debate as to whether family firms are
superior or inferior performers (Villalonga and Amit 2006; Miller et al. 2007) and
whether founder CEO matter compared to descendants or hired CEO (PerezGonzalez 2006; He 2008). We examine this issue in a specific yet important context
where family firms pursue risky investments by way of high technology mergers
and acquisitions (M&A). Formally, our paper aims to answer the following research
questions: How does the stock market react to the announcement of high technology
M&A undertaken by family firms? Does the family firms governance characteristics (e.g. use of control enhancing mechanisms, family involvement in management) and strategy affect this reaction?
Prior M&A studies have mostly focused on managers incentives to undertake
acquisitions (Miller et al. 2010) and few studies (Ben-Amar and Andre 2006; FeitoRuiz and Menedez-Requejo 2010) have examined the impact of family ownership
on the value creation from acquisitions. High technology M&A represent a special
class of M&A given their high growth potential but also high risk (Kohers and
Kohers 2000, 2001; Hagedoorn and Duysters 2002; Benou and Madura 2005).
These are often motivated by the acquirers need to obtain highly developed
technical expertise and cutting-edge technology (Tsai and Wang 2008). Ranft and
Lord (2000, p. 296) suggest that acquiring firm may not have the ability to develop
these valuable knowledge-based resources internally or, alternatively, internal
development may take too long or be too costly. The acquisition of external
technology should enhance acquirers innovation level and knowledge base
resulting in better performance.
High-tech takeover targets are also highly risky because the valuations of these
companies are based on uncertain information (Kohers and Kohers 2001). Many
technology firms are young start-ups without any current revenues and whose value
lies heavily on the future development and commercial success of a new technology
(Benou and Madura 2005). Therefore, investors may have difficulties in understanding the technological complexity and to adequately evaluate future outcomes.
High-tech M&A provide an interesting setting to examine the ability of family
founders and their heirs in choosing high growth but risky investment projects.
This study contributes to the literature in at least two ways. First, to the best of
our knowledge, this is one of very few papers to examine how shareholders view the
effect of family ownership on firm value when the firm undertakes specific
investments. Second, we investigate the interactions between family firms, the
nature of the agency problems and their impact on the value creation from high tech
M&A. Villalonga and Amit (2006) posit that academic research should distinguish
between ownership, control and management to properly understand their effect on
firm value. Previous studies (Ben-Amar and Andre 2006; Feito-Ruiz and MenedezRequejo 2010; Miller et al. 2010) do not consider the specific interactions of the
various agency problems that can be encountered in family firms.
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1 Introduction
There is a substantial amount of evidence showing that family firms represent a
large fraction of public and private firms around the world (e.g. Claessens et al.
2000; Faccio and Lang 2002; Pedersen and Thomsen 2003; Anderson and Reeb
2003a). However, there exists considerable debate as to whether family firms are
superior or inferior performers (Villalonga and Amit 2006; Miller et al. 2007) and
whether founder CEO matter compared to descendants or hired CEO (PerezGonzalez 2006; He 2008). We examine this issue in a specific yet important context
where family firms pursue risky investments by way of high technology mergers
and acquisitions (M&A). Formally, our paper aims to answer the following research
questions: How does the stock market react to the announcement of high technology
M&A undertaken by family firms? Does the family firms governance characteristics (e.g. use of control enhancing mechanisms, family involvement in management) and strategy affect this reaction?
Prior M&A studies have mostly focused on managers incentives to undertake
acquisitions (Miller et al. 2010) and few studies (Ben-Amar and Andre 2006; FeitoRuiz and Menedez-Requejo 2010) have examined the impact of family ownership
on the value creation from acquisitions. High technology M&A represent a special
class of M&A given their high growth potential but also high risk (Kohers and
Kohers 2000, 2001; Hagedoorn and Duysters 2002; Benou and Madura 2005).
These are often motivated by the acquirers need to obtain highly developed
technical expertise and cutting-edge technology (Tsai and Wang 2008). Ranft and
Lord (2000, p. 296) suggest that acquiring firm may not have the ability to develop
these valuable knowledge-based resources internally or, alternatively, internal
development may take too long or be too costly. The acquisition of external
technology should enhance acquirers innovation level and knowledge base
resulting in better performance.
High-tech takeover targets are also highly risky because the valuations of these
companies are based on uncertain information (Kohers and Kohers 2001). Many
technology firms are young start-ups without any current revenues and whose value
lies heavily on the future development and commercial success of a new technology
(Benou and Madura 2005). Therefore, investors may have difficulties in understanding the technological complexity and to adequately evaluate future outcomes.
High-tech M&A provide an interesting setting to examine the ability of family
founders and their heirs in choosing high growth but risky investment projects.
This study contributes to the literature in at least two ways. First, to the best of
our knowledge, this is one of very few papers to examine how shareholders view the
effect of family ownership on firm value when the firm undertakes specific
investments. Second, we investigate the interactions between family firms, the
nature of the agency problems and their impact on the value creation from high tech
M&A. Villalonga and Amit (2006) posit that academic research should distinguish
between ownership, control and management to properly understand their effect on
firm value. Previous studies (Ben-Amar and Andre 2006; Feito-Ruiz and MenedezRequejo 2010; Miller et al. 2010) do not consider the specific interactions of the
various agency problems that can be encountered in family firms.
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Family firms and high technology Mergers & Acquisitions
131
We investigate the stock market reaction to high technology M&A undertaken by

family firms in Canada as it offers a setting with many family firms and use of
control enhancing mechanisms. Further, Canada offers a corporate governance
regime that is principles-based rather than rules-based like in the US. These
features are often considered as a weaker governance setting. Nevertheless,
Canada offers a strong legal protection regime for minority shareholders.
We find a positive relationship between family ownership and announcement
period abnormal returns. This relationship, however, starts to decrease at higher levels
of ownership but remains overall positive. Diversifying acquisitions undertaken by
family firms are not associated with value destruction to their shareholders. We also
show that the agency conflict between shareholders and professional managers has a
detrimental impact on announcement period abnormal returns whereas the conflict
between family block-holders and minority investors via control enhancing
mechanisms does not. Finally, we document that firms managed by founder CEO
earn higher returns than firms managed by the founders descendants or hired CEO.
The remainder of this paper is organised as follows. The next section reviews the
related literature and derives our testable hypotheses. The third section describes the
methodology and Sect. 4 presents and discusses the results. Section 5 offers a
conclusion and suggestions for future research.
2 Related literature and hypotheses

2.1 Family firms and value creation in M&A
The agency literature (Jensen and Meckling 1976) discusses the agency costs arising
from the conflict of interests between shareholders and professional managers
(agency problem 1). In a M&A setting, managers may undertake acquisitions to
increase their compensation and private benefits at the expense of dispersed
shareholders (Shleifer and Vishny 1997). According to the interest alignment
hypothesis (Jensen and Meckling 1976), family ownership concentration should
reduce costs associated with this agency problem and therefore should enhance
value. Large investors such as families have strong incentives and resources to
collect information and monitor professional managers (Shleifer and Vishny 1997;
Claessens et al. 2002). This active family monitoring should increase the quality of
the selection of target firms which should result in better acquisition decisions than
in non-family firms.
Furthermore, family members often hold the CEO and/or chairperson position in
the family firm (Anderson and Reeb 2003a). This active involvement should
improve their knowledge of the firm (firm-specific knowledge) and enhance their
investment decisions particularly in knowledge-based investments like R&D
projects or high-tech acquisitions (Chen and Hsu 2009; Chang et al. 2010).
In addition, family blockholders should have a longer investment horizon. Family
ties within family firms may create a culture of commitment, altruism and loyalty
which favour a focus on long term interests in investment decisions (Chen and Hsu
2009). Moreover, James (1999) argues that founding families often try to transfer
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their firm to the next generation and thus should have a long-term orientation and be
more efficient in their investment strategies than non family firms.
However, large family shareholders can also pursue personal objectives that can
differ from profit maximization and be detrimental to minority shareholders (agency
problem 2). Prior research suggests that family blockholders impose significant
costs to the firm because they may undertake sub-optimal investments (Zhang
1998). Given that a large proportion of the family wealth is invested in the firm and
their active involvement in the management, managers of family firms tend to be
more risk-averse managers (Chen and Hsu 2009; Chang et al. 2010; Miller et al.
2010). Therefore, family firms may be reluctant to undertake profitable innovative
strategies through high-tech acquisitions because it may increase the familys risk
and threatens the survival of the family firm. Chen and Hsu (2009) report that family
control is negatively related to the level of R&D investments which suggests that
family owners may limit risky but profitable R&D investments. Chang et al. (2010)
also document a negative association between family ownership and stock market
reaction to innovation announcements by Taiwanese firms.
The above effect is likely to be more severe as the amount of family wealth
invested in the firm increases. At high-levels of ownership, family blockholders
become entrenched and have sufficient power to undertake investment projects to
increase their private benefits or to reduce the firms risk (Zhang 1998; Connelly
et al. 2010). Given the existence of the alignment and entrenchment effects of
family ownership, prior research (Morck et al. 1988; Sanchez-Ballesta and GarcaMeca 2007; Cascino et al. 2010) suggests that family ownership may have a non
linear effect on firm performance.
The above arguments lead to the following hypothesis1:
H1: Family ownership has a positive effect on the stock market reaction to
high-tech M&A at low levels of family ownership (as a result of the
monitoring effect), and has a negative effects on the stock market reaction to
high-tech M&A at high levels of family ownership (as a consequence of the
expropriation effect)
Previous studies obtain mixed evidence on the effect of family ownership on firm
performance (Anderson and Reeb 2003a; Maury 2006; Villalonga and Amit 2006;
Miller et al. 2007; Sciascia and Mazzola 2008). Looking to M&A, Ben-Amar and
Andre (2006) document that family ownership has a positive effect on acquiring
firm performance in Canada while Feito-Ruiz and Menedez-Requejo (2010) report a
non linear relationship between family ownership and announcement period
cumulative abnormal returns in European M&A. Yen and Andre (2007) examine a
set of deals in English origin countries and find that value creating deals are
associated with higher levels of ownership concentration consistent with decreasing
agency costs as the dominant shareholders wealth invested in the acquiring firm
increases.
1
While some of the above issues could relate to other types of ownership concentration, we do not have
large state ownership in Canada and very large institutional ownership is rare in publicly listed companies
because of portfolio and risk considerations (see King and Santor 2008).
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Prior research (Miller et al. 2010; Gomez-Mejia et al. 2010; Anderson and Reeb
2003b) also suggests that family owners priorities should have a significant impact on
their firms strategic decisions (growth through M&A and diversification decisions).
Given that family blockholders would like to retain control over the firm for a long
period to transfer it to future generations (James 1999), they invest a large proportion
of their wealth in the family firm which increases their financial risk (Anderson and
Reeb 2003a). Unlike other blockholders, e.g., institutional investors who hold
diversified portfolios, family owners cannot diversify their personal portfolios
without diluting their voting rights as well as the socio-emotional wealth derived from
the control over the family firm (Gomez-Mejia et al. 2007). As a consequence, Miller
et al. (2010, p. 204) argue that family owners may try to diversify their personal
investment portfolios through diversifying acquisitions outside the core industry of
the family firm. These diversifying acquisitions allow them to reduce the familys
portfolio risk without losing control of the firm. Previous studies obtain mixed results
on the relation between family firms, diversification levels and firm value. Anderson
and Reeb (2003b) as well as Gomez-Mejia et al. (2010) find that family firms are less
diversified than non family firms. In contrast, Miller et al. (2010) document a positive
relation between family ownership and the likelihood of diversifying acquisitions.
We therefore examine the impact of diversifying acquisitions undertaken by
family firms. We argue that stock markets may react differently depending on the
acquisition motives. If family firms are expected to select efficiently their targets in
diversifying acquisitions to maximize firm value in the long term in order transfer it
to later generations, we should observe a positive stock market around the
announcement date.
H2: Diversifying acquisitions undertaken by family firms have a positive
effect on the stock market reaction to high-tech M&A
2.2 Family firms, agency problems and value creation in M&A
The conflict opposing family blockholders and minority shareholders is exacerbated
when the controlling family maintains control of the voting rights while holding a
small fraction of cash flow rights through control enhancing mechanisms such as
dual class shares and stock pyramids. These ownership structures involve large
agency costs due to the presence of both entrenchment and incentive problems.
Since the controlling shareholders have the power to make decisions but do not bear
the full cost, (Bebchuk et al. 2000) show how these ownership structures distort
decision making with regard to investment projects choice, firm size and transfer of
control. Prior studies (Cronqvist and Nilsson 2003; Anderson and Reeb 2003a;
Villalonga and Amit 2006) show that family use of control enhancing mechanisms
has a negative impact on firm performance.2
Prior studies testing the expropriation hypothesis through M&A obtain mixed
results. Bae et al. (2002) find evidence that controlling shareholders in large Korean
business groups (chaebols) use M&A to tunnel wealth from minority shareholders to
2
See Adams and Ferreira (2008) for a review of the literature on the impact of the use of control
enhancing mechanisms (dual class shares, stock pyramids and cross-ownership) on firm performance.
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themselves. Bigelli and Mengoli (2004) report a negative association between the
separation of ownership and control and the bidders announcement returns in Italy.
Holmen and Knopf (2004) as well as Faccio and Stolin (2006) do not find evidence
supporting the hypothesis of minority shareholders expropriation through mergers
and acquisitions in Western Europe. Recently, Wong et al. (2010) and Chang et al.
(2010) document a negative association between family excess control and stock
market reaction to corporate venturing and innovation announcements in Taiwan.
Based on the above discussion, we formulate the following hypothesis:
H3: The use of control enhancing mechanisms by family firms has a negative
effect on the stock market reaction to high-tech M&A
2.3 The effect of family management on value creation in M&A
Prior research documents mixed results on the relation between family management
and firm performance. Smith and Amoako-Adu (1999) and Perez-Gonzalez (2006)
report a negative stock markets reaction to the appointment of founder-descendants
as CEOs. Villalonga and Amit (2006) and He (2008) report that when the firms
founder is active in management (either as CEO or board chairperson), family
ownership has a positive effect on firm performance. In contrast, when founder
descendants serve as CEO, Villalonga and Amit find that family ownership is
negatively related to firm performance. Sciascia and Mazzola (2008) document a
quadratic negative association between the level of family involvement in
management (measured as the percentage of the firms managers related to the
controlling family) and firm performance in Italy.
Agency theory predicts that family management should attenuate agency
problem 1 opposing a professional manager to dispersed shareholders (Villalonga
and Amit 2006). A family CEO with a long experience within the firm (a founder or
a descendent) is likely to have a better knowledge about the family firm and should
pursue value creating acquisition strategies. Thus family management is likely to
enhance firm value. We test this prediction in the context of high-tech M&A:
H4: Family management has a positive effect on stock market reaction to
high-tech M&A
3 Data and methodology

3.1 Data
We obtain our data set of Canadian high tech acquisitions from the Thomson
Financial Securities Datas SDC PlatinumTM Worldwide Mergers & Acquisitions
Database (SDC database). We rely on SDC classification for high tech industries
which include biotechnology & health, communications, computers hardware and
software, electronics, among others industries.3 Our sample meets the following
3
See Kohers and Kohers (2000) for a list of SDC database high tech industries sectors.
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criteria: (1) Observations are for January 19972006; (2) Acquiring firms are listed
Canadian companies; (3) Deals are completed and are mergers, exchange offers, or
acquisitions of majority interest; (4) For companies with more than one merger
within a 1-year period, we consider only the first merger in order to circumvent the
contamination effect that results from multiple mergers announcement in the
estimation period; (5) Only transactions greater than US$10 million are included;
(6) Companies have merger announcement dates and others merger-related
information available from the SDC database, ownership and corporate governance
data available from company proxies on the SEDAR web site and stock return and
other financial data available from the CFMRC database and Stock-Guide database,
respectively. After eliminating observations with missing data and outliers, we end
up with a sample of 215 mergers undertaken between January 1997 and 2006.4
3.2 Canadian institutional setting
The Canadian governance setting is interesting since there is a fairly high level of
ownership concentration by dominant family shareholdings (Gadhoum 2006; King
and Santor 2008; Bozec and Laurin 2008). Recent financial research has shown that a
high degree of corporate ownership concentration is the norm around the world (La
Porta et al. 1999; Claessens et al. 2000; Faccio and Lang 2002). Further, in many
countries such as Canada, large publicly listed corporations have family shareholders
who exercise control over the voting rights with a small fraction of cash flow rights.
This separation between ownership and control rights is achieved through the use of
multiple voting shares, stock pyramids and cross-shareholdings (La Porta et al. 1999;
Cronqvist and Nilsson 2003). These findings have changed the focus of researchers
from the traditional conflict of interests between a professional manager and dispersed
shareholdersAgency problem 1towards another conflict of interests between
controlling and minority shareholdersAgency problem 2. The presence of separation
of control and ownership in Canada allows an examination of the effect of family
control, ownership and management as proposed by Villalonga and Amit (2006).
In addition, the Canadian approach to corporate governance is significantly
different from the one adopted in the US. Following the enactment of the Sarbanes
Oxley Act, the US adopted a rules-based approach that requires full compliance
with prescribed corporate governance rules (see section 303A of the NYSE listed
company manual). In contrast, the Canadian corporate governance regime is still
largely voluntary. This principles-based approach requires publicly listed firms to
4
Our sample selection procedure is consistent with prior M&A research using the SDC worldwide M&A
database (see for example, Rau and Vermaelen (1998) and Faccio and Stolin (2006)). The first five
selection criteria resulted in an initial sample of 342 high-tech takeovers. Consistent with the event-study
methodology, 46 observations with less than 100 valid returns over the 200-day estimation period were
dropped from the sample. We further eliminated 58 observations because their proxy circulars were not
available on the SEDAR website to code their ownership structure, governance and executive
compensation data. Finally, following normality diagnostic test on our dependent variable CAR (-1, ?1),
23 outliers were excluded. Our final sample includes 215 high-technology M&A undertaken by 105
unique acquirers. Given that our sample includes multiple acquirers over the period 19972006, Huber/
White/Sandwich estimators of variance allowing for observations that are not independent within clusters
(105 unique acquirers) are used to compute t-statistics in all regression models.
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disclose the extent of their compliance with the a proposed list of best practices
guidelines or to explain why they did not adopt these suggested practices (Broshko
and Li 2006).5
3.3 Variables definition
Table 1 provides a description of independent and control variables.
3.3.1 Dependent variable: announcement period abnormal returns
We use the well established event study methodology (Brown and Warner 1985) to
evaluate the change in wealth of acquiring firms shareholders around the
announcement of the transactions. The stocks expected return is computed using
the market model which parameters are estimated during the period of -240 and
-40 days from the announcement date.6 We use daily returns of the TSX/S&P
composite index as a proxy for market returns. Abnormal returns are cumulated
over 3 days (-1, ?1) around the announcement date.
3.3.2 Independent variables
Family ownership, control and management structure
Family ownership
Following prior research (Smith and Amoako-Adu 1999; Faccio and Lang 2002;
Maury 2006), we define family firms as those in which the founder or a member of
his or her family by either blood or marriage is the largest shareholder of the firm
either individually or as a group. The minimum threshold for family blockholding is
10 % of the voting shares and above, the imposed Toronto Stock Exchange
reporting requirement. We code a dummy variable for the presence of a family
blockholder at various levels and a continuous variable capturing the level of
ownership blockholding of the family.7
We use the same methodology as La Porta et al. (1999), Faccio and Lang (2002) and
Claessens et al. (2002) to measure the ultimate voting and ownership rights held by the
acquiring firms largest shareholder. Ultimate voting rights (family control) are
measured as the weakest link in the control chain while ultimate ownership (family
ownership) is measured as the fraction of equity capital held by the family blockholder.
5
National Policy NP 58-201 Corporate Governance Guidelines and National Instrument NI-58-101
Disclosure of Corporate Governance Practices provide a comprehensive description of the Canadian
corporate governance regime. Broshko and Li (2006) discuss also the main differences between corporate
governance regimes in Canada and the US.
6
Firms with \100 valid returns over the estimation period were excluded from the sample.
We reran the regressions with a dummy using 20 % threshold, spline dummies at the 1025 % level
and more than 25 % (in Canada the disclosure threshold is 10 %, contrary to the US disclosure threshold
of 5 %) and one with a 1050 % and more than 50 % dummy (consistent with the Cascino et al. (2010)
discussion of majority ownership and control). Results are consistent across various specifications so for
brevity we only present those at the 10 % level.
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Control enhancing mechanisms and family excess vote-holding

We code a dummy variable for voting structures that enable the familys voting
rights (family control) to exceed its cash flow rights (family ownership) via multiple
share classes with differential voting rights and pyramids where the family holds
shares in the firm through one or more intermediate entities of which the family
owns less than 100 %. The family excess vote-holding is the difference between the
voting rights and the cash flow rights.
Family firm management
We create a dummy variable to take into account the implication of foundingfamily or professional CEO in the management of the family firm. Professional
CEO is a dummy variable equals 1 if the acquiring firm prior to the transaction is
managed by a professional CEO. We further code whether the family CEO is the
founder or descendant.
3.3.3 Control variables
Acquiring firm characteristics
Institutional ownership in the acquiring firm
According to the efficiency-augmentation hypothesis, institutional investors have
strong incentives to effectively monitor managers. This enhances managerial
efficiency and the quality of corporate decision making including M&A (Duggal
and Millar 1999; Wright et al. 2002). On the other hand, according to the efficiencyabatement hypothesis, they do not act as effective monitors due to their short term
vision and passivity. It is argued that they have myopic investment objectives,
which causes them to sell the stock of an underperforming company rather than to
have a long term perspective and to pressure managers to favour value-enhancing
changes. Prior empirical studies (Duggal and Millar 1999; Kohers and Kohers 2000;
Wright et al. 2002) provide mixed evidence on the relationship between institutional
ownership and acquiring firm performance. Institutional ownership is measured as
the level of voting rights held by all institutional investors in the acquiring firm.
Board composition
Empirical studies examining the role of independent boards on value creation in
the case of M&A provide mixed evidence. Faleye and Huson (2002)8 find a positive
relationship while Byrd and Hickman (1992) present evidence that this relation is
non linear. Subrahmanyam et al. (1997) find a negative relationship in the case of
announcement date CAR of bank M&A. In a Canadian setting, Ben-Amar and
Andre (2006) find a significant positive association between the proportion of
unrelated directors and acquiring firm announcement period excess returns.
In this study, we rely on the TSX guidelines definition (TSX 1994) of unrelated
board members which considers a director as unrelated if he-she is not a manager of
the firm or of its subsidiaries; is not related to the controlling shareholder and does
not have business dealings with the firm which could create a conflict of interests.
8
Faleye and Huson (2002) find a positive relation between a measure of board effectiveness and bidder
returns. Firms receive high scores on the board effectiveness factor when they have small, independent
board that meet frequently.
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Board independence is measured as the ratio of the number of unrelated directors to

board size.
Board size
The governance literature (Jensen 1993; Yermack 1996; Eisenberg et al. 1998)
has also explored the effect of board size on firm value. The increase of board size
should enhance its expertise, counterbalance the CEOs dominance of the board and
enhance board effectiveness. On the other hand, larger boards may encounter
communication and coordination problems that reduce their effectiveness. Yermack
(1996) and Eisenberg et al. (1998) confirm this negative relationship between board
size and firm performance. Looking at M&A, Faleye and Huson (2002) and BenAmar and Andre (2006) document a negative relationship between board size and
acquiring firm CAR.
Leadership structure
Several studies have examined the effect of CEO duality (i.e., the CEO is also the
board chairman) on firm performance. Duality reduces firm performance because it
promotes CEO entrenchment, exacerbates CEO power and reduces board
effectiveness. Scholars from the organization theory argue, however, that duality
improves firm performance since it provides clear leadership to the firm (Kang and
Zardkoohi 2005). The empirical evidence does not generally support the idea that
duality is harmful to firm performance.9 Boyd (1995) finds that duality has a
positive effect while Baliga et al. (1996) find that it has no impact. In the context of
M&A, Faleye and Huson (2002) find that duality has no effect on acquiring firm
announcement period CARs.
Managerial incentives (equity based compensation)
While the issue of managerial incentive pay has been the topic of much
controversy over the past few years, the agency literature generally considers that
incentive pay is a useful mechanism to align managers interests with those of the
shareholders (Core et al. 1999). Shleifer and Vishny (1989) predict that equity based
compensation should reduce agency costs and limit the non-value-maximising
behaviour of managers of acquiring companies. Prior finance research (Datta et al.
2001) documents a positive association between equity based compensation and
acquirers announcement period CARs. Consistent with Bushman et al. (1996), the
relative importance of the CEOs performance-contingent compensation is
measured by the ratio of cash bonus plus stock options granted to the total
compensation earned by the CEO in the same period. The CEOs total
compensation includes salary, cash bonuses, other compensations and stock options.
Stock options are valued at 25 % of their exercise price at the time of the grant.10
US cross-listing
Charitou et al. (2007, 1282) points out that Canadian firms make up the single
largest group of foreign firms listed on a US stock exchange. Furthermore, and
9
See Dalton et al. (1998), Kang and Zardkoohi (2005) for a review of the board leadership structure
literature.
10
Similar to, among others, Brick et al. (2006), Archambeault et al. (2008), we implement the stock
option valuation method of Core et al. (1999) where we value stock options at 25 % of their exercise
price. Besides its simplicity, Core et al.s approach produces results that are in the range of those
generated by complex valuation models (see, for instance, Lambert et al. 1991; Core et al. 1999).
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unlike firms from other countries, Canadian companies are required to cross-list
ordinary shares (not ADRs) and submit to all filing and disclosure requirements.
Prior research (Doidge, Karolyi and Stulz 2004) suggests that cross-listing in the US
is a signal used by these firms to indicate their willingness to accept tougher
governance rules and further regulatory oversight. Charitou et al. (2007) document
an improvement in the governance practices of Canadian firms in the years
following their cross-listing in the US. Cross-listing in the US is measured through a
dichotomous variable that is equal to one if the acquiring firm is listed on a US stock
exchange and zero otherwise.
Free cash flows (FCF)
Jensen (1986) argues that managers of firms with large free cash flows are more
likely to undertake non-value creating acquisition strategies. In the tradition of Lang
et al. (1991) and more recent papers such as Gregory (2005), we control for the level
the acquirers free cash flows. Free cash flows are measured as cash flows from
operations divided by book value of assets.
Market-to-book ratio (MarkettoBook)
Jensen (2005) suggests that firms with high valuations have greater managerial
discretion which allows their managers to make poor deals once they have run out of
good ones. Dong et al. (2006) and Moeller et al. (2004) document that high
valuation firms make poor M&A deals. We measure firm valuation as the ratio of
market value of equity plus the book value of debt to the book value of assets.
Acquiring firm industry
We also control for the acquiring firms industry using the SDC database macro
industry identifier.
Target firm and deal characteristics
Public target
Kohers and Kohers (2000, 42) argue the market may perceive that the growth
opportunities of privately held high-tech companies are more valuable than those of
publicly traded high-tech companies. Benou and Madura (2005) and Kohers and
Kohers (2000) find the acquirers of privately held high-tech targets obtain higher
returns than the acquirers of public high-tech targets. Looking at Canadian
acquirers, Yuce and Ng (2005) as well as Ben-Amar and Andre (2006) document
that the acquisition of private targets is associated with higher announcement period
abnormal returns.
Payment method (Cash only)
Prior research finds that the mode of payment is one of the consistent factors that
influence the level of value creation in M&A (Andrade et al. 2001). In the context of
high tech acquisitions, Benou and Madura (2005) find that acquirer returns are
higher in cash offers than in stock or mixed offers. In contrast, Kohers and Kohers
(2000) find that both stock and cash financing are associated with significant
positive excess returns.
Related industries
Datta et al. (1992) note that the relatedness of the activities of the acquiring and
target firms is a key determinant of the level of value creation in M&A since
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140
P. Andre et al.
synergies are easier to achieve when firms have related business than when creating
conglomerates. Looking at acquisitions of high tech targets in the US, Kohers and
Kohers (2000) find that high tech acquirers obtain significantly higher returns than
non high-tech acquiring firms. Related industries is a dummy variable equal to 1 if
the acquirer and the target share the same 4-digit SIC code and zero otherwise.
Cross-border transactions (cross-border)
Cross-border transactions should benefit shareholders of both firms when the
merged firm can exploit market imperfections in outside markets (Eun et al. 1996).
However, integration costs and cultural problems often undermine these gains.
Empirical results have been somewhat mixed. Moeller and Schlingemann (2005)
show that US firms that acquire cross-border targets experience lower abnormal
performance and that the results are negatively associated with global and industrial
diversification but positively associated to legal systems offering better shareholder
protection. Faccio et al. (2006) report a positive association between the acquisition
of foreign targets and acquirer returns for a sample of European M&A. Ben-Amar
and Andre (2006) document that Canadian bidders involved in cross-border
transactions obtain higher returns than domestic acquisitions.
Deal size (log deal value)
Asquith et al. (1983) argue that bidder returns increase with relative size of the
target to the acquirer. Kohers and Kohers (2000), as well as Benou and Madura
(2005), report a positive relation between the relative transaction size and acquirer
abnormal returns in high-tech acquisitions. We control for transaction size and
measure deal size as the log of the deal value.
Time period
To control for the high technology wave that occurred in the period 19972000
we introduce a dummy variable equals to one if the deal occurs in that period.
4 Results
4.1 Descriptive statistics
Our sample consists of 215 transactions between January 1997 and 2006 with an
annual average value of US $ 352.2 million and total value of over US $ 75.7
billion. These figures are smaller than those reported in US studies. For example, the
average transaction value in Benou and Madura (2005) is US $ 433.2 million. The
largest numbers of deals occurs in the year 2000, the peak of the new economy
bubble, with 53 deals worth some 27.6 billion dollars, an average deal size of 520
million. Most acquirers are high-tech firms, followed by telecoms and health
industry firms. The largest deals were initiated by telecom companies.
Table 2 provides descriptive statistics of variables examined in this study. As
shown in Panel (i), the average family ownership stake in the acquirer prior to
merger announcement is 11.5 %, however, this level increases to 25.2 % when
considering the 98 family firms only (45.6 % of total sample). These figures confirm
significant corporate ownership concentration in Canada as reported in previous
studies (Gadhoum 2006; Ben-Amar and Andre 2006; Bozec and Laurin 2008). The
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141
Table 1 Variable description

Variable
Description
(i) Family control and family structure

Family ownership dummy
Dummy variable that equals one if the acquirers largest shareholder is a family
(the founder or a member of his or her family by either blood or mariage) and
zero otherwise. A large shareholder is an individual or an entity with a voting
stake of 10 % or more
Family ownership stake
Percentage of ownership (cash-flow) rights of all classes of the acquiring firms

shares held by the family as a group prior to the transaction
Family voting stake
Percentage of voting rights of all classes of the acquiring firms shares held by
the family as a group prior to the transaction
Control-enhancing
mechanisms dummy
Dummy variable equals 1 if there are multiple voting share classes, pyramids or
cross-holdings in the acquiring firm
Family excess vote-holding
Difference between the percentage of voting rights of the family and cash flow
rights held by the family in the acquiring firm prior to the transaction
Professional CEO dummy
Dummy variable equals 1 if the acquiring firm prior to the transaction is

managed by a professional CEO, i.e., someone who is not a family member
(ii) Acquiring firm characteristics

Institutional ownership
dummy
Dummy variable equal 1 if one or more institutional investors own 10 % or

more of the acquiring firms cash flow rights prior to the transaction
Institutional ownership stake
Percentage of cash flow rights held by institutional investors in the acquiring

firm prior to the transaction
Board independence
Ratio of unrelated directors to number of board members in the acquiring firm

prior to the transaction
Board size
Number of board members in the acquiring firm prior to the transaction
CEOCOB
Dummy variable equals 1 if the acquiring firm CEO is also board chairman prior
to the transaction
Incentive compensation
The ratio of the market value of options granted to the acquiring firm CEO
divided by his/her total compensation in the year prior to the deal
US listing
Dummy variable equals 1 if the acquiring firm is listed on a US exchange

(NYSE, NASDAQ, AMEX) prior to the transaction, and 0 otherwise
FCF
Acquiring firm cash-flow from operations divided by the book value of assets at
end of year prior to the transaction
MarkettoBook
The ratio of the market value of equity plus the book value of debt to the book
value of assets at end of year prior to the transaction
(iii) Target firm and deal characteristics

Public target
Dummy variable equals 1 if target firm is listed on a stock exchange
Cash only
Dummy variable equals 1 if transaction is entirely financed with cash
Diversification
Dummy variable equals 1 if acquirer and target do not share the same 4-digit
SIC code
Cross-border
Dummy variable equals 1 if target nation is not Canada
Log deal value
Logarithm of the deal total value
Pre 2001 time Period
Dummy variable equals 1 if the transaction is announced between January 1997

and December 2000
Governance information is collected from Information Circulars available on SEDAR (sedar.com). Transaction
characteristics are obtained from the Thomson Financial Securities Datas SDC PlatinumTM Worldwide Mergers
& Acquisitions Database. Financial information is from Compustat or StockGuide
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P. Andre et al.
142
Table 2 Descriptive statistics
Variables
Mean
Median
SD
Min.
Max.
(i) Family control and management structure

Family ownership dummy (10 %)
0.456
0.000
0.499
0.000
1.000
0.115
0.000
0.187
0.000
0.879
Non zero cases (98)

Family voting stake
Non zero cases (98)
0.252
0.187
0.206
0.013
0.879
0.209
0.000
0.300
0.000
0.925
0.476
0.429
0.298
0.106
0.925
Control enhancing mechanisms
0.200
0.000
0.401
0.000
1.000
0.102
0.000
0.218
0.000
0.756
0.510
0.536
0.171
0.130
0.756
0.744
1.000
0.437
0.000
1.000
Institutional ownership dummy
0.218
0.000
0.414
0.000
1.000
0.045
0.000
0.105
0.000
0.703
0.703
Non zero cases (43)

Professional CEO
0.207
0.142
0.132
0.102
Board independence
Non zero cases (47)
0.706
0.750
0.154
0.182
0.938
Board size
9.690
9.000
3.584
4.000
19.000
CEOCOB
0.237
0.000
0.426
0.000
1.000
0.290
0.220
0.296
0.000
1.000
US listing
0.535
1.000
0.500
0.000
1.000
FCF
0.064
0.081
0.133
-0.633
0.442
MarkettoBook
2.143
1.680
1.694
0.172
11.778

Public target
0.316
0.000
0.466
0.000
1.000
Cash only
0.502
0.000
0.501
0.000
1.000
Diversification
0.665
0.000
0.473
0.000
1.000
Cross-border
0.591
1.000
0.493
0.000
1.000
Log deal value
4.205
3.834
1.621
2.302
9.134
Pre 2001 time period
0.470
0.000
0.500
0.000
1.000
Sample of 215 mergers and acquisitions by Canadian acquiring firms between January 1997 and 2006 for
completed transactions over US$ 10 million obtained from the Thomson Financial Securities Datas SDC
PlatinumTM Worldwide Mergers & Acquisitions Database. See Table 1 for variable description
average voting stake for these 98 firms is 47.6 % confirming the presence of control
enhancing mechanisms. Control enhancing mechanisms (multiple class shares,
pyramids) are present in 20 % of the sample but represent 43.9 % of family firms.
The excess vote-holding (difference between voting rights and cash flow rights) is
10.2 % overall but in fact 51 % when considering only the firms with these
mechanisms. Looking at management, 74.4 % of firms are run by professional
CEOs, or conversely, 25.6 % of all the sample firms are managed by a family
member or some 56 % of family firms are run by a family member.
From Panel (ii), institutional ownership in the acquirer prior to merger
announcement is 4.5 %, however, this climbs to 20.7 % when considering the 47
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143
non zero cases. Moreover, the average board size is 9.69 members where a majority
are unrelated directors (70 %). The roles of CEO and chairman of the board are
cumulated in 23.7 % of the firms of our sample. CEO incentive compensation is on
average 29.0 % of total compensation. Canadian acquirers are listed in the US in
53.5 % percent of cases. Panel (ii) also indicates that the average level of free cash
flows is 0.06 and the average market to book is 2.143.
From Panel (iii), we can see that 50.2 % of deals are paid exclusively with cash
or cash equivalent. Furthermore, most transactions in our sample involve private
targets; only 31.6 % of the acquired firms in our sample are publicly held firms. In
addition, close to 60 % of our observations involve cross-border transactions. We
denote 66.5 % of deals are diversifying acquisitions involving two firms in
unrelated industries (i.e., high tech acquirers with a different 4-digit SIC code as the
target). Panel (iii) also reports that the average log of deal value is 4.205 and 47 %
of deals occur prior to 2001 during what some have called the new economy bubble.
4.2 Announcement period abnormal returns
We begin by analysing the average impact of mergers and acquisitions on the
change in wealth of acquiring shareholders around the announcement for our sample
of Canadian high tech M&A over the January 19972006 period. As shown in
Table 3, there are positive and statistically significant abnormal returns around the
transaction announcement.
Cumulative abnormal returns (CAR) obtained by acquiring firms shareholders
around the announcement day are positive and significant at 0.98 % within days -1
and ?1 (1.52 % for raw returns and 1.36 % for market adjusted returns). Also,
53.02 % of deals have positive CARs (58.14 % of raw returns and 57.67 % of
market adjusted returns). The positive short term CARs around announcement day
are consistent with prior Canadian studies (Eckbo and Thorburn 2000; Yuce and Ng
2005; Ben-Amar and Andre 2006). These results are also consistent with the prior
US short window studies (Kohers and Kohers 2000; Benou and Madura 2005)
investigating investors initial reaction to the announcement of high-tech M&A. Our
results suggest that stock market participants had a positive perception of the
potential value creation of high tech M&A undertaken by Canadian acquirers over
the period January 19972006.
Table 4 presents the partial correlation matrix between CAR and the independent
variables. The announcement abnormal returns are positively and significantly
correlated with the presence and level of institutional ownership but negatively and
significantly correlated with the presence of professional (non-family) CEO and
with the size of the board. The CARs are also negatively correlated with the deals
involving publicly listed targets and with the size of the deal. These results are
consistent with Moeller et al. (2004). Table 5 presents the announcement period
abnormal returns, cumulated over the 3-day window (-1, ?1), by dichotomous
variables. Our results confirm those in Table 3, that is, acquirer shareholders enjoy
significant positive excess returns in the presence of institutional ownership and
when purchasing private firms rather than public ones. On a univariate dimension,
there is no significant difference in the CARs of US and non-US listed acquirers,
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P. Andre et al.
144
Table 3 Abnormal returns and cumulative abnormal returns around high-tech M&A announcement
Period
Mean
Median
t-stat
% of Positive CAR
0.0122
2.451**
58.14
0.0100
3.198***
57.67
0.0037
3.351***
53.02
Cumulative abnormal returns

Raw returns
-1 to ?1
0.0152
Market adjusted abnormal returns

-1 to ?1
0.0136
Market model abnormal returns

-1 to ?1
0.0098
PlatinumTM Worldwide Mergers & Acquisitions Database. AR stands for abnormal return and CAR for
cumulative abnormal returns. We define the abnormal return for a stock i on day t to be the actual returns,
return
Rjt, minus
a stocks expected

which is computed using either the market return or the market
^ Rmt , where ^ai and b
^ were obtained from the ordinary least-squares
model: ARit Rit ^ai b
i
(OLS) regression of stock returns with market returns during an estimation period spanning day -240 to
day -40, where day 0 (the event day) indicates the day on which the merger was first announced.
Abnormal returns are cumulated (CAR) over the 3 day (-1, ?1) windows. **, *** indicate statistical
significance at 5 and 1 % levels, respectively
between all cash deals and those with some stock payment, between cross-border
and national deals, between deals involving firms in related or non-related
industries, or across time periods. We do notice that family controlled firms obtain
announcement period abnormal returns of 1.53 % compared to 0.53 % for non
family firms. Table 4 also indicates positive correlation between the presence and
the level of family control, albeit not significant at conventional levels. Deals
undertaken by firms managed by professional CEOs generate 0.35 % abnormal
returns whereas those with family CEOs obtain 2.8 % abnormal returns, the
difference being significant.
4.3 Agency problems and announcement period abnormal returns
Table 6 offers a first examination of the link between various agency problems and
acquiring firm announcement period abnormal returns using the Villalonga and
Amit (2006) framework. The average CARs for the 27 family firms with family
CEOs and without control enhancing mechanisms (Type I firms: no potential
agency conflicts) are 3.59 % (median 2.40 %). This contrasts with the average
CARs of 2.04 % (med. 0.91 %) for the 28 family firms with family CEOs but
having control enhancing mechanisms (Type II firms: potential conflict between
large and small shareholders or agency problem 2). The differences become much
sharper when comparing with the 145 firms having professional CEOs without
control enhancing mechanisms (Type III firms: potential shareholder-manager
conflict or agency problem (1) which have average announcement period abnormal
returns of 0.49 % (med. 0.24 %) and with the 15 firms with professional CEOs
and control enhancing mechanism (type IV firms: potential of both conflicts,
123

Table 4 Partial correlation
matrix: announcement period
abnormal returns on ownership,
agency problems, deal and
acquiring firm characteristics
145
CAR(-1, ? 1)
0.1164
0.0492
Control enhancing mechanisms
0.0014
-0.0247
Professional CEO
-0.1843*

This table reports Spearman

correlations between
announcement period abnormal
returns and independent
variables. Announcement period
abnormal returns are cumulated
over the 3 day window (-1,
?1), where day 0 (the event day)
indicates the day on which the
merger was first announced,
using the market model
parameters estimated between
-240 and -40 days. Sample of
215 mergers and acquisitions by
Canadian acquiring firms
between January 1997 and 2006
for completed transactions over
US$ 10 million obtained from
the Thomson Financial
Securities Datas SDC
PlatinumTM Worldwide Mergers
& Acquisitions Database. See
Table 1 for variable description.
* indicate statistical significance
at 10 % or more
0.1500*
0.1802*
Board size
-0.1621*
Board independence
-0.0577
CEOCOB
0.0172
-0.0246
US listing
-0.0307
FCF
MarkettoBook
0.1355*
-0.0822
Acquirer industry:
High-tech
Health
-0.0393
0.0725
Telecoms
-0.0163
Media
-0.0029
Industrial
Other
0.0486
-0.0488

Public target
Cash only
Diversification
Cross-border
Log deal value
-0.2201*
0.0560
-0.0279
0.0329
-0.1156
0.0682
i.e., Agency problem 1 and 2) having average CARs of -0.90 % (med. -1.67 %).
Further, tests show that firms with professional CEOs have significantly lower
CARs both in the absence of control enhancing mechanisms and overall. Type IV
firms (presence of both agency problems) have significantly lower abnormal returns
than all other firms. These univariate results suggest that the conflict between
shareholders and professional managers (agency problem 1) has a detrimental
impact on announcement period abnormal returns whereas the conflict between
large and small investors via control enhancing mechanisms (agency problem 2)
does not. The presence of both agency problems has a negative impact on
shareholder wealth. These results agree with Villalonga and Amit (2006) who show
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P. Andre et al.
146
Table 5 Announcement period abnormal returns by ownership, governance, deal and acquiring firm
characteristics (categorical variables)
CAR (-1, ? 1)
SD
F test
Z test

Yes
0.0153
0.0604
98
No
0.0053
0.0576
117
1.54
-1.178
0.00
0.570
7.28***
2.156**
Control enhancing mechanism

Yes
0.0100
0.0610
43
No
0.0098
0.0585
172
Yes
0.0035
0.0572
160
No
0.0280
0.0604
55
Professional CEO

Institutional ownership
Yes
0.0265
0.0597
47
No
0.0052
0.0581
168
4.91**
-2.499**
0.32
-0.224
0.29
0.000
CEOCOB
Yes
0.0140
0.0699
51
No
0.0086
0.0553
164
US listing
US listed
0.0078
0.0565
115
Canadian listed
0.0122
0.0618
100
-0.0092
0.0560
68
0.0187
0.0584
147

Target firm listing status
Listed
Private
10.84***
3.091 ***
Cross-border transaction
Cross-border
0.0115
0.0605
127
Domestic
0.0075
0.0569
88
0.23
-1.213
0.67
-0.754
0.17
-0.258
1.00
-0.936
Payment method
All cash
0.0131
0.0605
108
Stock and mixed
0.0075
0.0569
107
Diversification
Related
0.0122
0.0698
72
Diversification
0.0087
0.0529
143

Jan 1997Dec 2000
0.0141
0.0557
101
Jan 2001Jan 2006
0.0061
0.0617
114
Announcement period abnormal returns are cumulated over (-1, ? 1), where day 0 (the event day)
indicates the day on which the merger was first announced, using the market model parameters estimated
between -240 and -40 days.See Table 1 for variable description. **, *** indicate statistical significance
at 5 and 1 % levels, respectively
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147
Table 6 Impact of agency problems on announcement period abnormal returns

Conflict of interest between large
and minority shareholder
(Agency problem 2)
No [One share, one vote]
Yes [Control-enhancing
mechanisms]
Total
Test of differences (F test &

Wilcoxon Ranksum z test)
Conflict of interest between owners

and managers (Agency problem 1)
No [Family
CEO]
Yes [Professional
CEO]
Total
Test of differences
(F test &Wilcoxon
Ranksum z test)
27
145
172
6.59**
0.0359
0.0049
0.0098
2.20**
0.0240
0.0024
0.0056
(Type I firms)
(Type III firms)
28
15
43
2.44
0.0204
-0.009
0.0100
1.605
0.0091
-0.0166
-0.0031
(Type II firms)
(Type IV firms)
55
160
215
7.28***
0.0281
0.0035
0.0098
2.156**
0.0184
0.0001
0.0037
0.90
0.87
0.00
5.59**
1.145
1.308
0.570
2.481**
Top number is number of firms of each type, middle number is the mean announcement abnormal returns
and the bottom number is the median announcement period abnormal returns. Announcement period
abnormal returns are cumulated over (-1, ? 1), where day 0 (the event day) indicates the day on which
the merger was first announced, using the market model parameters estimated between -240 and
-40 days. See Table 1 for variable description. **, *** indicate statistical significance at 5 and 1 %
levels, respectively
that agency problem 1 has the most detrimental effect on firm value as measured by
Tobins Q.
4.4 Family ownership, agency problems, and announcement period abnormal
returns
We use linear regression models to examine the multivariate relationship between
family ownership, agency problems and acquiring-firm announcement period
abnormal returns. We use Huber/White/Sandwich estimators of variance allowing
for observations that are not independent within clusters to compute t-statistics to
control for the significant presence of multiple acquirers (104 unique acquirers for
the 215 deals). All our regressions include dummies for acquirers industry.
However, their coefficients are not shown for brevity. Table 7 shows the results of
OLS regressions of CAR on family ownership and control variables. In model 1,
family ownership is measured with a dummy variable while model 2 introduces
family ownership levels. Model 3 considers a non linear relationship between family
ownership and announcement CAR.
Table 7, model 1, shows that the family ownership dummy coefficient is positive
and significant (0.026, p \ 0.01). The positive relation between family ownership
and CARs remains in model 2 when we introduce ownership levels (0.0005,
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P. Andre et al.
148
Table 7 OLS regression of announcement period abnormal returns on family ownership, acquiring firm,
target firm and deal characteristics
Model 1
Coefficient
Model 2
t-stat
Coefficient
Model 3
t-stat
Coefficient
t-stat
(i) Family ownership

Family ownership dummy
(10 %)
0.0265
2.81***
0.0005
2.32**
Family ownership stake2
0.0017
-0.0000
3.06***
-2.26**

0.0173
2.12**
0.0197
0.75

Board independence
2.05**
0.0683
2.21**
0.87
0.0151
0.61
Board size
-0.0023
CEOCOB
0.0067
0.62
0.0102
0.96
0.0052
0.47
-0.0029
-0.19
-0.0077
-0.46
-0.0077
-0.48
US listing
-0.0114
-1.31
-1.38
FCF
MarkettoBook
Acquirer industry
-2.11**
0.0634
0.0228
-0.0024
-2.07**
-0.0019
-0.0106
-1.21
-0.0121
0.0016
2.62***
0.0011
1.30
0.0008
-0.0058
2.61***
-0.0053
-2.24**
-0.0056
-1.69*
0.92
-2.39**

Public target
Cash only
Diversification
Diversification * family
ownership
Cross-border
-0.0296
-3.31***
-0.0298
-3.28***
-0.0302
-3.47***
0.0048
1.01
0.0035
0.45
0.0042
0.53
-0.0131
-1.23
-0.0146
-1.46
-0.0138
-1.38
0.0249
1.19
0.0008
1.64
0.0010
2.27**
-0.0040
-0.46
-0.0024
-0.27
-0.0026
-0.30
Log deal value
0.0001
0.02
0.0001
-0.02
0.0000
0.01
0.0268
3.09***
0.0281
3.18***
0.0274
3.11***
Intercept
0.0055
0.19
0.0087
0.29
0.0063
0.21
R2
F Statistic
0.1768
0.1687
0.1849
73.07***
68.85***
71.31***
PlatinumTM Worldwide Mergers & Acquisitions Database.Announcement period abnormal returns are cumulated over (-1, ?1), where day 0 (the event day) indicates the day on which the merger was first announced,using the market model parameters estimated between -240 and -40 days. Huber/White/Sandwich
estimators of variance allowing for observations that are not independent within clusters (105 unique acquirers)
are used to compute t-statistics. All our regressions include dummies for acquirers industry. However, their
coefficients are not reported for brevity. See Table 1 for variable description. *, **, *** indicate statistical
significance at 10, 5 and 1 % levels, respectively
p \ 0.05). However the results of model 3 show a non linear relation between
family ownership and announcement returns. The coefficient of family ownership
(family own stake) is positive and significant while the coefficient of squared value
of family ownership is negative and significant. The inflexion point is at a 52 %
level of ownership. Given the level of the coefficients, we can conclude that the
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149
positive relationship starts to decrease at higher levels of ownership but remains

overall positive. Our results confirm hypothesis 1.
These results are similar to those of Feito-Ruiz and Menedez-Requejo (2010)
who find that family ownership has a positive and significant effect on acquirer
shareholders wealth up to an ownership level of 34 %. Beyond this ownership
level, family ownership has a negative effect. Our results suggest that at higher
levels of ownership, i.e., the family has a higher amount of wealth invested in the
firm, the market perceives that the family are making deals with less value creation
potential. One explanation presented in the literature is that family owners may limit
their risk taking strategies as the level of investment in the firm increases (Miller
et al. 2010).
Table 7 also presents the results of the effect of diversifying acquisitions
undertaken by family firms on the announcement period abnormal returns (H2).
This effect is measured through the interaction term between family ownership and
relatedness dummy (Diversification * Family ownership). The coefficient of the
interaction variable is positive in the three models and is statistically significant in
model 3 only although not necessarily economically significant. These results
suggest that the stock market does not perceive diversifying acquisitions undertaken
by family owners as value-decreasing. In contrast, our results seem to imply that
family owners select carefully their target firms in diversifying acquisitions as much
as in related type deals.
Table 7 also shows that the presence and level of institutional ownership
positively affects announcement period abnormal returns. Consistent with the
efficiency augmentation hypothesis of institutional ownership benefits, our results
are consistent with Wright et al. (2002) but contrasts with Kohers and Kohers (2000)
who report a negative relation between institutional shareholdings and high-tech
acquirers excess returns. These results confirm the effective monitoring role of
institutional investors. Given their ownership stake and their large resources,
institutional investors can impact corporate strategy and enhance corporate decision
making including M&A. We further find a negative relationship between
announcement date CAR and board size consistent with results by Yermack
(1996) and Eisenberg et al. (1998). We also document a negative association
between market-to-book and excess returns earned by acquirer shareholders. This is
consistent with Jensens (2005) conjecture that firms with high valuations make
poorer acquirers and confirmed by Moeller et al. (2004) and Dong et al. (2006).
When we control for variables related to the target firms and deal characteristics,
we find that acquisitions of public targets are negatively associated to announcement
period abnormal returns, consistent with prior literature. Deals prior to 2001, i.e.,
during the high-tech bubble, generate higher abnormal returns to acquiring firm
shareholders than subsequent deals. The payment method, relatedness, location and
deal size have no significant effect on acquiring firm performance.11
11
As additional sensitivity tests (un-tabulated results), we run regressions using market adjusted returns
and find similar results. We also use alternative definitions for related industry (same SDC macro industry
code, same 1 digit SIC codes) and replace the all cash dummy by the level of cash paid and results remain
the same.
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P. Andre et al.
150
Table 8 OLS regression of announcement period abnormal returns on agency problems, acquiring firm,
target firm and deal characteristics
Model 1
Coefficient
Model 2
t-stat
Coefficient
t-stat
(i) Agency problems

Control-enhancing mechanisms ($)
0.0095
0.75
0.0004
1.63
Professional CEO dummy(&)
-0.0252
-2.44**
-0.0205
-2.06**
Interaction $ and &
-0.0179
-1.05
-0.0007
-2.61**

0.0197
2.53**
0.0207
0.84

Board independence
2.04**
0.67
Board size
-0.0021
CEOCOB
0.0082
0.75
0.0098
0.86
-0.0023
-0.15
-0.0025
-0.16
-1.82*
0.0690
0.0172
-0.0025
-2.21**
US listing
-0.0072
-0.85
-0.0067
-0.77
FCF
-0.0199
-0.68
-0.0238
-0.82
MarkettoBook
-0.0057
-0.0056
-2.30**
Acquirer industry
2.37**

Public target
-0.0268
-2.92***
-0.0279
-3.06***
Cash only
0.0080
1.00
0.0086
1.09
Diversification
0.0004
0.05
-0.0001
-0.08
Crossborder
0.0009
0.11
0.0010
0.12
Log deal value
0.0001
0.03
0.0004
0.11
0.0234
2.68***
0.0235
2.71**
Intercept
0.0221
0.76
0.0255
0.88
R2
0.1802
0.1909
F Statistic
3.71***
5.85***
PlatinumTM Worldwide Mergers & Acquisitions Database.Announcement period abnormal returns are
cumulated over (-1, ?1), where day 0 (the event day) indicates the day on which the merger was first
announced, using the market model parameters estimated between -240 and -40 days. Huber/White/
Sandwich estimators of variance allowing for observations that are not independent within clusters (105
unique acquirers) are used to compute t-statistics. All our regressions include dummies for acquirers
industry. However, their coefficients are not reported for brevity. See Table 1 for variable description. *,
**, *** indicate statistical significance at 10, 5 and 1 % levels, respectively
Turning more specifically to the potential agency problems, multivariate results

in Table 8 support those found in Table 6. The coefficient on professional CEO
(non-family CEO, i.e., agency problem 1) is negative and significant in both models
1 and 2. This result suggests that family-managed firms earn higher abnormal
returns than firms managed by a professional CEO. Family managers have generally
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151
a longer experience within the firm and are likely to have a better knowledge of its
business than a hired CEO. Hence, they may have superior managerial expertise to
pursue value creating acquisition strategies particularly in high-technology
industries.
As shown in Table 8, the coefficients on either the presence of control-enhancing
mechanisms or the level of family excess vote holding (agency problem 2) are both
non significant. H3 is therefore not supported. Family use of controlling enhancing
mechanisms does not seem to affect the success of major investment projects such
as high-tech M&A.
The presence of both agency issues, the interaction term, is negative and
significant in model 2. Overall, the results of Table 8 suggest that the potential
agency conflict between shareholders and professional managers (agency problem
1) has a detrimental impact on announcement period abnormal returns whereas the
potential agency conflict between large and small investors via control enhancing
mechanisms (agency problem 2) does not. The presence of both agency problems
has a further negative impact on shareholder wealth. It is possible that the market
expects the presence of family excess control to amplify the agency costs associated
with the conflict between shareholders and professional managers. When family
block-holders use control enhancing mechanisms, they hold control over the firm
with a small fraction of cash flow rights and internalize only a small portion of the
wealth implications of a non-optimal investment decision. Therefore, stock market
participants may perceive them as less effective in monitoring professional
managers acquisition decisions which exacerbate agency costs resulting from
agency problem 1.
These findings are consistent with arguments made by James (1999) and
Anderson and Reeb (2003a) who suggest that the sheer amount of wealth families
have invested in the firm is a sufficient incentive to maximise firm value and restrain
from extracting private benefits which would make it difficult to establish a long
term relationship with the investment community, raise additional capital to grow
the firm and would increase the cost of capital. We can suggest that countries with
well-developed markets and offering good minority shareholder protection can
reduce the agency problems between family owners and minority shareholders, to a
certain extent, as long as the family shareholder continues to play an active role in
the management of the firm.
4.5 Do founders matter?
The results of Tables 6 and 8 suggest that family management has a positive effect
on the market reaction to high-technology M&A. We further examine the impact of
family management to see whether the positive effect is limited to the firms
founders or remain with descendant CEO. Similar to Villalonga and Amit (2006)
and He (2008), we examine the impact of CEO type (founder, descendant or
professional manager) on the value creation from our risky high tech acquisitions.
The results in Table 9 are consistent with the valuable role played by the founders
of the firm. High tech acquisitions initiated by a founder CEO create significant
value to shareholders. The abnormal announcement returns are 3.2 % on average
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P. Andre et al.
152
Table 9 Effect of founder CEO on family firms announcement period CARs
Professional CEO
Mean
(t-Stat)
43
-0.0010
Median
Standard
deviation
F Statistic
0.0001
0.0567
3.28**
-0.0058
0.0618
0.0240
0.0603
0.0110
0.0604
(-0.12)
Descendant CEO
12
0.0157
(0.92)
Founder CEO
43
Family firms
98
0.03152
(3.50)***
0.0153
Professional CEO
Founder CEO
Comparison of mean differences in CARs by CEO type (Scheffe test)

Founder CEO
0.0325**
p value = 0.042
Descendant CEO
0.0168
-0.01577
p value = 0.684
p value = 0.716
PlatinumTM Worldwide Database. Announcement period abnormal returns are cumulated over (-1, ?1),
where day 0 (the event day) indicates the day on which the merger was first announced, using the market
model parameters estimated between -240 and -40 days. **, *** indicate statistical significance at 5
and 1 % levels, respectively
(median 2.4 %). This result is significantly higher than that from family firms
managed by the descendants or by professionals. These results confirm the positive
impact of founders on firm value as reported by Villalonga and Amit (2006) and He
(2008). These findings suggest that founder CEO may possess specific characteristics which may distinguish their acquisition ability, even more so in the context of
difficult-to-value targets like high-tech firms. Further, founders have a better
understanding of the business as their long term involvement in having created and
managed the firm and are often the longest tenured member of the firm, they have a
significant economic interest in the business and are committed to its success (He
2008). In contrast, descendant CEO may not possess these inherent characteristics
or the same drive (Perez-Gonzalez 2006) whereas hired professionals introduce
agency costs as discussed above.
5 Conclusion
We investigate the effect of family ownership, excess control and management on
the stock market reactions to high-tech merger announcements. We find a non linear
relationship between family ownership and acquiring firms announcement period
abnormal returns; positive up to certain point and then decreasing. Our results
suggest that as family ownership increases, family blockholders may adopt risk
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153
reducing strategies leading them to forgo profitable but risky investment projects.
These findings contribute to a better understanding of how family owners
preferences and risk attitude affect firm performance. Moreover, the non linear
association between family ownership and stock market reaction to high-tech M&A
qualifies the question as to whether family firms are superior or inferior performers.
We also show that the conflict of interests between shareholders and professional
managers (agency problem 1) has the most harmful effect on shareholders wealth
whereas the conflict between large family owners and minority shareholders via
control enhancing mechanisms (agency problem 2) does not. To the best of our
knowledge, our paper is the first to consider the interactions between the two agency
problems and to test which of the two has the most detrimental effect on the quality
of an important business decision: high technology M&A. Furthermore, following
Villalonga and Amit (2006), this paper distinguishes between ownership, control
and management to better understand the family effect.
Adding to the family business literature, we find that family involvement in
management has a positive effect on the wealth creation of high-tech M&A and that
founders CEO are associated with better performance than hired CEOs. These
results confirm the valuable role played by founders in the success of family firms.
Given their long-term involvement in the firm and their better understanding of the
business, founders have more expertise in the selection of difficult to value targets
(such as high-tech firms) which results in value-creating acquisition strategies. Our
findings do not support the altruism argument (Lubatkin et al. 2005) that family
firms protect and favour incompetent family CEO who likely lack the expertise to
undertake value-creating acquisitions.
Further, our results contribute to the on-going debate about the impact of control
enhancing mechanisms, such mechanisms appearing more and more in the
landscape (e.g. founders of Google and Facebook have retained control enhancing
mechanisms following their IPO). One explanation for not finding a negative impact
is that families have such a significant amount of wealth invested in the firm and this
is a sufficient incentive to maximise firm value and restrain them from extracting
private benefits which would make it difficult to establish a long term relationship
with the investment community, raise additional capital to grow the firm and would
increase the cost of capital (James 1999; Anderson and Reeb 2003a).
Our findings are also of interest to regulatory authorities on the issue of whether
family blockholders use M&A transactions to expropriate minority shareholders and
obtain private benefits. Our conclusion does not support the expropriation
hypothesis and suggests that the current legal protections offered to minority
shareholders in Canada may limit expropriation and tunnelling opportunities
through M&A. Our results indicate that a jurisdiction with a well-developed stock
market and offering good minority shareholder legal protection can reduce the
agency problems between dominant and minority shareholders.
As is the case with prior M&A research, this study is not without limitations. We
examine investors short term reaction to high-technology M&A announcements by
Canadian firms but do not test post-merger performance change. An extension to
this paper would be to examine the relation between family ownership and longterm (market and operating) acquiring firm performance. Future research should
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P. Andre et al.
also look to the association between agency problems in family firms and postmerger performance in different industries and countries to test whether the papers
conclusions can be extended.
Further, given that family ownership in publicly listed firms is widely prevalent
around the world, future research should investigate the effect of family ownership,
control and management on other financial and strategic decisions. As suggested by
Chang et al. (2010), academic research should further explore the channels
through which family control and management affects firm value. An important
dimension to explore is family culture and its influence on firm value (see, for
instance, Chrisman et al. 2002 and Zahra et al. 2004). More specifically, future
research could examine how the different dimensions of organizational culture
within a family firm shape its performance following an M&A. Finally, our study
focuses on high-technology M&A as an example of a high growth but risky
investment project. A further extension would be to examine the effect of family
control and involvement in management on the choice between different forms of
investments (R&D projects, capital expenditure, M&A) as well as its impact on firm
performance.
Acknowledgments We thank seminar participants at the Corporate Governance: An International
Review Conference in Birmingham and EFM Athens and comments from colleagues at the University of
Edinburgh, HEC Montreal, Universite du Quebec a` Montreal and Universite de Paris I and XII. Walid
Ben-Amar gratefully acknowledges financial support from the University of Ottawas Telfer School of
Management Research fund. Paul Andre gratefully acknowledges support from the Research Alliance in
Governance and Forensic Accounting funded within the Initiative on the new economy program of the
Social Sciences and Humanities Research Council of Canada (SSHRC). Paul Andre was on honorary
visiting professor at Cass Business School during some work on this paper.
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Author Biographies
Paul Andre (Ph.D. University of Waterloo) is professor of accounting at ESSEC Business School and
research director of the ESSEC KPMG Financial Reporting Centre. He has published papers in the areas
of capital market research, financial statement analysis, corporate governance, and mergers and
acquisitions. Some work on the paper was done while honorary visiting professor at Cass Business
School.
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P. Andre et al.
Walid Ben-Amar is associate professor of accounting at the Telfer School of Management at the
University of Ottawa. He holds a Ph.D. in Accounting from HEC Montreal. His research interests include
corporate governance, mergers and acquisitions and corporate disclosure strategies. He has published his
work in academic journals such as Journal of Business Finance & Accounting, British Journal of
Management and Journal of Applied Accounting Research.
Samir Saadi is a Ph.D. candidate in Finance at Queens University. He was a Visiting Scholar at New
York University and a Visiting Researcher at INSEAD. His research interests include executive
compensation, corporate governance, mergers and acquisitions, and corporate payout policy. Along with
six book chapters, Samir has several published/forthcoming papers in refereed journals such as Financial
Management, Contemporary Accounting Research, Journal of Business Ethics, Journal of International
Financial Markets Institutions and Money, Multinational Finance Journal, Journal of Multinational
Financial Management, Journal of Applied Finance, and Quarterly Review of Economics and finance.
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Family Firms and High Technology Mergers and Acquisitions

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J Manag Gov (2014) 18:129158

Family firms and high technology Mergers &

Published online: 11 May 2012

Family firms and high technology Mergers & Acquisitions

We investigate the stock market reaction to high technology M&A undertaken by

2 Related literature and hypotheses

Family firms and high technology Mergers & Acquisitions

3 Data and methodology

Family firms and high technology Mergers & Acquisitions

Family firms and high technology Mergers & Acquisitions

Control enhancing mechanisms and family excess vote-holding

Board independence is measured as the ratio of the number of unrelated directors to

Family firms and high technology Mergers & Acquisitions

Family firms and high technology Mergers & Acquisitions

Table 1 Variable description

(i) Family control and family structure

Family ownership stake

Percentage of ownership (cash-flow) rights of all classes of the acquiring firms

Family voting stake

Family excess vote-holding

Professional CEO dummy

Dummy variable equals 1 if the acquiring firm prior to the transaction is

(ii) Acquiring firm characteristics

Dummy variable equal 1 if one or more institutional investors own 10 % or

Institutional ownership stake

Percentage of cash flow rights held by institutional investors in the acquiring

Ratio of unrelated directors to number of board members in the acquiring firm

Number of board members in the acquiring firm prior to the transaction

Dummy variable equals 1 if the acquiring firm is listed on a US exchange

(iii) Target firm and deal characteristics

Dummy variable equals 1 if target firm is listed on a stock exchange

Dummy variable equals 1 if transaction is entirely financed with cash

Dummy variable equals 1 if target nation is not Canada

Log deal value

Logarithm of the deal total value

Pre 2001 time Period

Dummy variable equals 1 if the transaction is announced between January 1997

(i) Family control and management structure

Family ownership stake

Non zero cases (98)

Control enhancing mechanisms

Family excess vote-holding

Institutional ownership dummy

Institutional ownership stake

Non zero cases (43)

Non zero cases (47)

(iii) Target firm and deal characteristics

Log deal value

Pre 2001 time period

Family firms and high technology Mergers & Acquisitions

Cumulative abnormal returns

Market adjusted abnormal returns

Market model abnormal returns

Family firms and high technology Mergers & Acquisitions

Family ownership stake

Control enhancing mechanisms

Family excess vote-holding

(ii) Acquiring firm characteristics

This table reports Spearman

(iii) Target firm and deal characteristics

(i) Family control and management structure

Control enhancing mechanism

(ii) Acquiring firm characteristics

(iii) Target firm and deal characteristics