Are Family Firms More Risk Averse Regarding M&A Transactions?

Bachelor Thesis, 2018

46 Pages, Grade: 1,0


Table of Contents


Table of Contents

Table of Tables

Table of Abbreviations

1 Introduction

2 Theoretical Background and Hypothesis Development
2.1 Risk Behavior of TFFs and LFFs
2.2 M&A Behavior of TFFs and LFFs
2.3 Target Firm Size as a Proxy for the Acquirer’s Risk
2.4 Influence of Family and Founder CEOs on Risk and M&A Behavior

3 Methodology
3.1 Sample
3.2 Data
3.3 Dependent Variable
3.4 Independent Variables
3.5 Control Variables
3.6 Analytical Approach

4 Results
4.1 First Regression: M&A Behavior of TFFs and LFFs
4.2 Second Regression: Influence of Family and Founder CEOs

5 Discussion
5.1 Theoretical Implications
5.2 Practical Implications
5.3 Limitations
5.4 Avenues for Future Research

6 Conclusion



Affirmation in lieu of oath

Table of Tables

Table 1: Variable Definition

Table 2: First Correlation Table

Table 3: Frist Regression

Table 4: Second Correlation Table

Table 5: Second Regression

Appendix 1 (Table 6): First Correlation Table - Detailed

Appendix 2 (Table 7): Second Correlation Table - Detailed

Table of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten


In line with the prevalent notion that family businesses are more risk averse than non-family firms when facing strategic decisions that impact the long-term survival of the business, I hypothesize that the risk behavior resulting from the ownership structure of a firm affects its M&A activity. However, in order to gain a deeper understanding of the underlying risk mechanisms and theories, I differentiate between true family firms and lone founder firms throughout the course of this thesis. In a study of 177 firms listed in the German Prime Standard, I found that that true family firms show a lower propensity towards large target firm sizes when engaging in M&As as they want to avoid large, potentially destabilizing transactions. Furthermore, the presence of a family CEO in the firm reinforces this general tendency towards risk aversion. Although I did not find a significant relation between lone founder firms and target firm sizes, I empirically show that the presence of a founder CEO in these firms is associated with larger target firm sizes. Therefore, firms that are run by the founders themselves show a comparatively risk seeking behavior.

1 Introduction

Family firms account for approximately 90% of all companies worldwide and play a pivotal role in most countries’ economies (Aldrich & Cliff, 2003). It therefore comes as no surprise that the intensity of academic research with a focus on family firms has increased over the last two decades (Gedajlovic, Carney, Chrisman, & Kellermanns, 2012). One important aspect of research on family businesses is their risk behavior. In their articles, several authors contrasted and compared the risk behavior of family firms with the risk behavior of companies with a dispersed ownership structure (Anderson & Reeb, 2003a; La Porta, Lopez- De-Silanes, & Shleifer, 1999).

Research on risk behavior and the underlying preferences of family firms so far has been inconclusive: On the one hand, scholars argue that the status of family ownership is associated with risk aversion as families have their wealth concentrated in the business (Anderson & Reeb, 2003a) and follow a long-term strategy (Gentry, Dibrell, & Kim, 2016) characterized by a more patient use of capital (Arregle, Hitt, Sirmon, & Very, 2007). On the other hand, other researchers more recently have indicated that family firms are willing to accept performance hazards, and thus take economic risks, in order to preserve their socioemotional wealth (SEW) (Gómez-Mejía, Haynes, Núñez-Nickel, Jacobson, & Moyano-Fuentes, 2007; Kraiczy, Hack, & Kellermanns, 2015; Poletti-Hughes & Williams, 2017).

Against this background, the risk behavior resulting from different ownership structures should also be considered in mergers and acquisitions (M&As). Caprio, Croci, and Del Giudice (2011) remarked that prior literature on M&As mostly neglected the role of family control. However, they also noted that, since the early 2000s, research on the effect of family ownership on M&A activity has intensified. Researchers argued that the distinctive motivations and priorities of family firms such as the desire to pass on the business to the next generation result in a different investment and acquisition behavior (Miller, Le Breton- Miller, & Lester, 2010).

In addition, this thesis contributes to the debate of heterogeneity that has gained increasing attention in recent literature (e.g. Cannella, Jones, & Withers, 2015; Miller, Le Breton-Miller, Lester, & Cannella, 2007). I differentiate between lone founder firms and true family firms as their different social contexts may induce distinct behaviors. In order to avoid any possible misunderstanding, true family firms will be abbreviated by TFF and lone founder firms by LFF respectively throughout the entire thesis. There exists a multitude of definitions of a family firm in extant literature and therefore finding a consensus on the exact definition is difficult (Miller et al., 2007). For this study, I follow the definition of Miller et al. (2007) who suggest that a TFF is “one in which multiple members of the same family are involved as major owners or managers, either contemporaneously or over time” (p. 836). In line with the definition of Miller et al. (2007), LFFs are defined as “those in which an individual is one of the company's founders with no other family members involved, and is also an insider (officer or director) or a large owner” (p. 837). Following this logic, if family members are present alongside the active founders, the firm consequentially is categorized as a family firm. Moreover, I investigate if the involvement of a founder chief executive officer (CEO) or family CEO in the firm has an impact on the decision-making process.

In a study of 177 firms publicly listed in the German Prime Standard, I analyzed how the risk behavior resulting from different ownership structures affected M&A activity over the period 2009-2017. I contribute to the extant literature by contrasting the risk behavior of TFFs and LFFs in such transactions with other firms that have a different ownership structure. I empirically found that TFFs show a lower propensity towards large target firm sizes when engaging in M&As. I expect this behavior to be caused by their risk aversion that might result in the avoidance of potentially destabilizing M&As which ultimately could jeopardize the long-term survival of the business. The presence of a family CEO in the firm reinforces this general tendency. Although I did not find a significant relation between LFF status and target firm sizes, I empirically show that the presence of a founder CEO in LFFs is associated with larger target firm sizes. Therefore, LFFs that are run by the founders themselves demonstrate a comparatively risk seeking behavior.

This thesis is structured as follows. In section 2, I provide a theoretical background of extant literature on risk behavior and M&A behavior of TFFs and LFFs and develop my hypotheses. Thereafter, section 3 describes the sample and how the data has been retrieved, explains the independent, dependent, and control variables, and finally describes the statistical model used to test the hypotheses. In section 4, the results of the statistical regression are outlined. The findings are discussed in detail in section 5. In this section, I also outline limitations of the study, practical implications, and avenues for future research. In section 6, the thesis will be concluded.

2 Theoretical Background and Hypothesis Development

This section provides an overview of prior research on risk behavior and M&A behavior of family firms. Thereafter, two sets of hypotheses will be derived by suggesting how specific risk preferences that are associated with different ownership structures will affect a firm’s M&A behavior. In order to disentangle the complex of multiple studies and observations that produced diverging results, TFFs will be considered separately from LFFs. It should be noted that the inclusion of LFFs in family business research has been initiated only recently (e.g. Cannella et al., 2015; Miller et al., 2007) which is why it will be assumed that studies investigating “family firms” refer to TFF. Besides the heterogeneity among the ownership structure of the firm, the influence of the presence of a family CEO or founder CEO in the firm will be analyzed and, based on this, the second set of hypotheses will be derived.

2.1 Risk Behavior of TFFs and LFFs

Extant literature dealing with risk behavior of TFFs so far is inconclusive and impedes to derive explicit risk preferences of these companies. Although many scholars argued that TFFs are more risk averse than their non-family counterparts, more recently, several researchers challenged that prevalent notion and pleaded for a differentiated consideration of risk types. TFFs are not only concerned with economic performance but at the same time also pursue non-economic goals such as the preservation of legacy and SEW (e.g. Gómez- Mejía et al., 2007). After the overview of research on risk behavior of TFFs, this subsection also outlines the risk behavior of LFFs.

Those researchers who argue that TFFs are more risk averse than other firms often advance arguments with regard to vulnerability risk. This concept of risk describes the probability of bankruptcy (Boyd, Graham, & Hewitt, 1993; Dichev, 1998). Specifically, risk aversion of TFFs might be caused by the following reasons. First, families often invest the majority of their wealth in the firm and therefore have a poorly diversified investment portfolio compared with other individuals or shareholders of non-family firms (Anderson & Reeb, 2003a; Boubaker, Nguyen, & Rouatbi, 2016). La Porta et al. (1999) argued that due to the wealth concentration the family has an incentive to minimize business risk which is why these firms show greater risk aversion compared with other firms. The risk aversion might even result in an obstruction of economic growth and development (La Porta et al.,

1999; Morck & Yeung, 2003). Second, the consequences of a potential bankruptcy are more severe in TFFs compared with firms that have a different ownership structure as the business often provides employment for other family members (Poletti-Hughes & Williams, 2017). Furthermore, the accumulated family wealth and therefore the wellbeing of future generations might be at stake (Schulze, Lubatkin, & Dino, 2002). Moreover, in a bankruptcy situation the family reputation might be compromised (Bartholomeusz & Tanewski, 2006). Third, conservatism in TFFs might be induced because the family wants to avoid the loss of non-economic values tied to the business such as the benefits of patrimony (Naldi, Nordqvist, Sjöberg, & Wiklund, 2016). Fourth, the family wants to maintain the control of the business (Muñoz-Bullon & Sanchez-Bueno, 2011) which is why the access to capital might be limited and economic growth could be decelerated . Finally, agency conflicts in TFFs are less pronounced since, according to agency theorists, the concentration of ownership in a firm discourages investment decisions that rewards managers through compensation at the expense of increased business risk or even lower shareholder value (Fama & Jensen, 1983). In TFFs, interests of managers and owners tend to be more aligned and investment decisions are made more thoughtfully since the family considers business expenses as their own money (Boubaker et al., 2016).

On the other hand, in contrast to the prevalent notion of risk aversion, scholars have argued more recently that TFFs sometimes are taking more risks than other firms. Therefore, it is important to introduce a second type of risk. As outlined in the following, the risk affinity of TFFs does not refer to the bankruptcy risk but instead these firms are risk taking with regard to variability risk. Variability risk is a risk concept that follows the definition of for instance Van Horne who identifies risk as the deviation between expected and actual returns of investment (as cited in McConaughy, Matthews, & Fialko, 2001). Scholars have advanced the following arguments supporting the hypothesis that TFFs are taking higher variability risks compared with other organizations. First, they are willing to accept performance hazards or current financial losses in order to pursue non-economic goals and preserve their SEW (Gómez-Mejía et al., 2007; Kraiczy et al., 2015; Poletti-Hughes & Williams, 2017). According to the concept of SEW, the family is emotionally connected with the firm and actively seeks to maintain control and ownership driven by economic but also non-economic criteria such as the preservation of family identity and authority or the provision of valuable employment opportunities for family members (Gómez-Mejía et al., 2007). Second, TFFs might make different decisions because of their long-term orientation (Muñoz-Bullon & Sanchez-Bueno, 2011). An investment decision that is beneficial in the long-term might cause volatile cash flows in the short-term. Whereas in a TFF agency conflicts are less pronounced, in a company with a dispersed ownership structure the managers might be more concerned with the firm’s performance during their tenure and therefore attach greater importance to short-term results (Huybrechts, Voordeckers, & Lybaert, 2013). Third, TFFs are more independent from financial markets (Gentry et al., 2016) which is why they are under less short-term pressures exerted from financial investors but instead benefit from patient capital. Therefore, they can afford volatile cash flows in the short term if the investments pay off in the long term.

Overall, it can be summarized that the risk behavior of TFFs in general turns out to be more complex and manifold than expected originally in early research on the risk behavior of TFFs. The predominant assumption of risk aversion is well founded but primarily refers to vulnerability or bankruptcy risk. In contrast, several researchers argued that within the frame of variability risk, a different type of risk, TFFs are rather risk taking compared to non-family businesses. In the following, LFFs shall be introduced and literature on their attitudes towards risk will be analyzed.

Most of the prior literature analyzing family firms and their behavior did not differentiate between TFFs and LFFs (Cannella et al., 2015; Miller et al., 2007), which is why the research on risk behavior of LFFs is still tentative and not as numerous and fruitful compared with research on TFFs. Cannella et al. (2015) argued that the joint consideration of TFFs and LFFs is caused by their similarities with regard to the agency theory. However, LFFs should be observed separately as their unique social context leads to a different strategic behavior (Miller, Le Breton-Miller, & Lester, 2011). This differentiation is of major importance as one-third of all family firms worldwide are run by one or multiple founders, while the remaining two thirds are run by the descendants of the founding family (La Porta et al., 1999).

When compared with TFFs, LFFs show a different behavior because of their social context: The important stakeholders for lone founders are a diverse group of venture capitalists, investors, employees, customers, partners, and others which all have primarily economic interests compared to the non-economic goals of family members behind a TFF (Donaldson & Preston, 1995). In a LFF, the stakeholders exert pressures on the lone founder with the aim of the exploitation of economic opportunities, enhancement of service to the client, or the successful positioning in the market and outperformance of competition (Greve, Hitt, Ireland, Camp, & Sexton, 2003). When addressing these pressures, the lone founder assumes an individualistic, entrepreneurial role where the company can be seen as an extension of the entrepreneur himself (Miller et al., 2011; Wasserman, 2006). Furthermore, Vries (1977) argued that founders establish companies in order to seize market opportunities and besides the economic benefit gain independence and autonomy. In short, while TFFs are concerned about reputation, transgenerational intention, and other aspects unique to their ownership structure, LFFs strive for economic achievement and the maintaining of their discretion and independence (Cannella et al., 2015).

Because of their entrepreneurial, growth-oriented nature, firm founders more likely show a risk seeking attitude than other shareholders. Cramer, Hartog, Jonker, and van Praag (2002) argued that the lower degree of risk aversion of entrepreneurs is a result of the variability of rewards when compared to wages of employment. Besides, entrepreneurs are widely known as rather risk taking in terms of vulnerability or bankruptcy risk as their business models are often new and unproven. This becomes apparent from the high failure rate of startups.

However, because of the high pressures from venture capitalist and other investors who expect financial returns (Greve et al., 2003), LFFs only can accept performance variability to a limited degree. Furthermore, the limited access to financial resources, especially cash, during the first phases of a LFF might increase the need of stable returns and therefore potentially leads to risk aversion regarding variability risk.

Considering the ambiguous research results of the risk behavior of TFFs and LFFs, studies on the implications of their risk behavior in important and impactful transactions and decisions are of major importance in order to gain a deeper understanding of the underlying risk preferences in those businesses. Therefore, existing literature dealing with the M&A activity of TFFs and LFFs will be analyzed in the following subsection. Thereafter, two sets of hypotheses will be formulated and tested throughout this thesis.

2.2 M&A Behavior of TFFs and LFFs

Over the last decade, M&A activity worldwide has increased dramatically and despite the major changes in the control and organization of global business activity that M&As induce, extant research so far does not permit a full understanding of the M&A processes (Faccio & Masulis, 2005). The advantage of conducting studies on M&A activity is the availability of data of these transactions and the explanatory power of a firm’s behavior and mechanisms as these processes constitute impactful decisions that need to be considered thoughtfully. In conjunction with the specific TFF status, researchers found that the ownership structure of a firm influences the decision and its underlying processes regarding M&As (Bauguess & Stegemoller, 2008; Boellis, Mariotti, Minichilli, & Piscitello, 2016; Caprio et al., 2011; Miller et al., 2010; Shim & Okamuro, 2011). Miller et al. (2010) argued that if larges shares of the firm are held by a family, the family members are able to shape the company’s M&A strategy in accordance with their risk preferences because on the one hand they have the incentive to do so due to the investment’s size but on the other hand also have the power as they are large shareholders. Also Caprio et al. (2011) emphasized that the decision maker’s incentives are shaped by the firm’s ownership structure. Analogous to the previous subsection, the M&A behavior of LFFs will be outlined subsequently to the analysis of the M&A behavior of TFFs.

The M&A behavior of TFFs and LFFs is investigated in this context because extant literature suggests that M&A transactions increase the default risk of the acquiring company: Furfine and Rosen (2011) found that the default risk of the acquirer increased even after controlling for the bidder’s change in leverage and even after mergers where the acquirer’s leverage increases. Reuer and Ragozzino (2014) argued that the risks for the acquiring company are primarily related to hazards regarding the relationship between seller and acquirer or adverse selection. Although M&A transactions are supposed to improve the company’s competitive position and affect economies of scope and scale which decreases systematic risk, firm-specific risk tends to increase in those transitions (Lubatkin & O'Neill, 1987).

Against this background, several researchers hypothesized and found empirical support that TFFs show a more conservative behavior regarding M&A transactions as they are assumed to minimize their vulnerability risk: In a study of 898 US firms, Miller et al. (2007) found that family ownership is negatively associated with the volume and the value of acquisitions. Also Bauguess and Stegemoller (2008), by analyzing data of S&P 500 firms, found that the propensity of a TFF to make acquisitions is lower. Caprio et al. (2011) came to the same conclusion for European firms and added that the probability of launching a takeover bid is lower when families are large shareholders of the firm. Not only acquisitions but also mergers were subject of empirical studies. Shim and Okamuro (2011) found that Japanese TFFs show a lower propensity to merge than their non-family counterparts. They also argue that the benefits from mergers are greater for firms with a dispersed ownership structure than for TFFs.

In the following paragraphs, the reasons behind the apparent risk averse behavior of TFFs in M&As will be outlined. First of all, it is widely known that families behind TFFs have different, unique priorities such as the desire to pass on the company and family wealth to future generations (Arregle et al., 2007; Miller & Le Breton-Miller, 2005). It therefore is of major importance to these families that they retain control over the business in the long term. The fear of a potential dilution of control results in a risk aversion that becomes apparent in the family’s resistance to impactful transactions such as M&As (Caprio et al., 2011). Prior research so far has shown that families are reluctant to dispose of their controlling stakes to outsiders (Bauguess & Stegemoller, 2008; Klasa, 2007). Boellis et al. (2016) argued that because the family includes the business in its utility function, the fear of losing control translates in a risk averse international growth strategy. Especially M&A transactions may cause the dilution of the family’s voting power either directly if the acquisition is paid in shares (Caprio et al., 2011) or later as a takeover funded with cash often leads to the issuing of new equity in the future (Martynova & Renneboog, 2009). Shim and Okamuro (2011) remarked that the extent of the dilution of ownership concentration in a merger depends on the relative size of the target firm to the acquirer.

Second, there are other, non-economic drivers that might weaken the desire to exploit economic opportunities such as M&As. Miller and Le Breton-Miller (2005) argued that TFFs avoid acquisitions that might destabilize the business as they want to build enduring relationships with their stakeholders. This strategy of continuity aims at reducing risk and sustaining the firm in the long-term. Acquisitions, however, might disrupt this social system with stakeholders inside and outside the firm (Friedland, Palmer, & Stenbeck, 1990). Furthermore, the transactions together with its integration challenges afterwards might jeopardize not only firm performance but also firm reputation (Miller et al., 2010; Miller & Le Breton-Miller, 2005). Also Boellis et al. (2016) argued that risk aversion of TFFs is a consequence of the deliberate objective to combine non-economic and economic benefits of control and the identification with the firm. More generally, the desire to preserve the firm’s SEW causes a different behavior than in firms with a dispersed ownership structure and the family-centric social objectives translate into a more conservative behavior that discourages disrupting M&As in order to preserve the wealth and values the TFF has built up over many years (Berrone, Cruz, & Gomez-Mejia, 2012). The avoidance of such transactions that might undermine the continuity of the transgenerational intention (Faccio, Marchica, & Mura, 2011), however, might result in increased performance hazards as value-creating economic opportunities might not be exploited (Gómez-Mejía et al., 2007; Poletti-Hughes & Williams, 2017).

Third, many scholars advance agency theory as a possible explanation for the risk averse behavior of TFFs in M&As. Specifically, if the family owns and controls the business, the free-rider problems that might occur in firms with a dispersed ownership structure might be mitigated (Shleifer & Vishny, 1986). In companies where ownership and management are separated, conflicting interests of owners and managers might cause decisions of managers that reward themselves but penalize the firm through lower shareholder value. The agency conflict also has an impact on M&A decisions. Since acquisitions that increase the size of the firm often lead to an increase of the manager’s salary (Gorton, Kahl, & Rosen, 2005), the manager has an incentive to pursue these transactions. Furthermore, managers in non- family firms might make acquisitions in order to create empires (Morck, Shleifer, & Vishny, 1990) or because of their overconfidence (Malmendier & Tate, 2008). The maximization of the individual utility is easier for managers when ownership and control is separated because information in this setting is more asymmetric and potentially disadvantageous activities can be hidden better from outside shareholders (Furfine & Rosen, 2011). Benefits for managers are also increased if takeover threats are reduced which is why executives in firms with dispersed ownership structure might have an incentive to increase size by pursuing M&As in order to defend themselves from hostile takeovers. To summarize, managers possess the power and the knowledge over owners that enables them to make M&A transactions that erode firm value but increase personal benefits for them. Caprio et al. (2011) argued that deal proposals are examined more thoroughly in TFFs and because the interests of owners and managers need to be taken into account, the propensity to make acquisitions decreases in these firms. Benefitting from the well-considered decisions, Anderson and Reeb (2003b) found that TFFs in the United States achieve a higher performance and valuation through M&A activity compared with their non-family counterparts.

Fourth, TFFs might show a lower M&A activity because of the limited access to financing that is needed to successfully complete these transactions. Researchers argued that TFFs show a risk averse behavior regarding M&As as they want to avoid a dilution of control that results from an transaction funded by equity (Amihud, Lev, & Travlos, 1990; Faccio & Masulis, 2005; Ward, 2004). Dreux (1990) argued that while equity financing increases the risk profile of the firm, debt financing is also unattractive for TFFs as they wish to preserve a balance sheet with a healthy leverage ratio and want to assure the firm’s longevity. In fact, acquisitions financed by debt can excessively increase bankruptcy probability (Furfine & Rosen, 2011). TFFs use a similar debt level than non-family firms (Anderson & Reeb, 2003a) but are more prone to relying on internal funds than companies with dispersed ownership structure (Koropp, Kellermanns, Grichnik, & Stanley, 2014). Also Faccio and Masulis (2005) argued that TFFs have an incentive to fund their M&A activity with cash. However, cash-financed acquisitions imply a higher probability in the future to issue new equity in order to offset the excessive use of cash before and therefore the family potentially loseses control over the business (Martynova & Renneboog, 2009).

Fifth, TFFs might behave more risk aversely in M&A transactions because they lack the managerial competencies to successfully accomplish such important transactions (Miller et al., 2010; Ward, 2004). In non-family firms, institutional shareholders and professional managers possess or have access to relevant knowledge and enrich the company with international experience gained in other companies and markets (Tihanyi, Johnson, Hoskisson, & Hitt, 2003). In line with this, Boellis et al. (2016) suggested that the presence of family members in management is associated with less risky establishment modes in foreign countries: He argued that due to the lack of competencies TFFs prefer a greenfield initiative rather than a more risky acquisition when entering a foreign market.

Finally, TFFs might show a more risk averse behavior in M&As as they fear to lose their family wealth. Anderson and Reeb (2003b) argued that the survival of the company is more beneficial than shareholder value enhancing transactions for families. Because a large proportion of the family’s financial resources are tied to the firm, the family refrains from investments that potentially jeopardize the business (Faccio et al., 2011). This wealth concentration also results in a poor portfolio diversification of TFFs (Anderson & Reeb, 2003a). In contrast to the previous arguments of scholars suggesting a lower M&A activity of TFFs, Bauguess and Stegemoller (2008) argued that they might have an incentive to pursue more M&A transactions in order to increase the diversification of their private portfolios through the diversification of the business owned. However, they were not able to empirically support this hypothesis in their study.

To conclude, extant literature on the propensity of TFFs to engage in M&As draws a quite consistent picture about the risk preferences and underlying causes that indicate a lower M&A activity in firms owned by families compared with their non-family counterparts. The risk aversion towards bankruptcy risk can be explained by the family’s desire to retain control, preservation of SEW, agency theory, specific financing problems, and wealth concentration.

In contrast to the many studies on M&A behavior of TFFs, not many papers investigated the relation between LFF status and the M&A activity. As a result of the avoidance of conflicts that might occur in traditional TFFs, Miller et al. (2010) suggested that LFFs will choose a strategy of growth associated with innovation, market expansion, and shareholder maximization. In their study, contrasting to the finding that TFFs are reluctant to make acquisitions, they could not find similar results for LFFs and hypothesized that these firms show a more active M&A behavior. However, they could not empirically support that LFFs engage comparatively more in M&As. Also Achleitner, Kaserer, and Kauf (2012) argued that LFFs focus particularly on economic pursuits and innovation and their strategy is more likely to be the maximization of shareholder value. Since the social approval and self-image of the founder is often tied to the success of the firm, the founder has an incentive to make capital investments that benefit the business and the shareholders (Kirzner, 1979). Fahlenbrach (2009) found that founder CEOs make higher R&D investments, capital expenditures and carry out more M&As. Also Miller et al. (2011) empirically showed that LFFs are more likely to embrace growth strategies than other firms. In line with this, they found that LFF status is associated with higher investment in infrastructure.

To summarize, the risk aversion of TFFs might result in a M&A behavior that avoids excessively large transactions while LFFs are expected to show a more active M&A behavior in order to inorganically grow their young businesses rapidly.

2.3 Target Firm Size as a Proxy for the Acquirer’s Risk

The aim of this study was to analyze how the risk behavior resulting from different ownership structures affects M&A activity. However, a deeper theoretical discussion on fundamental risk theories shall be neglected. March and Zur Shapira (1987) argued that, besides the fact that there exists no universal definition of risk throughout academic literature, the managerial perspective anyway differs from the theoretical concepts of risk like decision theory and instead is more concerned with the practical implications and outcomes. The fact that the risk preference is a complex concept that differs from organization to organization complicates the assessment and measurement of the risk behavior of organizations. Therefore, this study investigates the M&A behavior of firms as these transactions constitute impactful, thoughtfully considered decisions (Hackbarth & Morellec, 2008) and provide publicly accessible data. The following paragraphs will outline why the target firm size, measured by the sum of the target firms’ revenues in the last financial year before the M&A, will serve as a risk proxy for the acquirer in my study. After the description of the relation between target firm size and default risk of the acquirer, the first set of hypotheses will be derived.


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Are Family Firms More Risk Averse Regarding M&A Transactions?
Otto Beisheim School of Management Vallendar  (Institut für Familienunternehmen)
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Familienunternehmen, Family Business, M&A, Risiko, Risk
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Thilo Wenig (Author), 2018, Are Family Firms More Risk Averse Regarding M&A Transactions?, Munich, GRIN Verlag,


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