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.
Table of Contents
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
Research Objectives and Themes
This thesis examines whether family-owned firms exhibit greater risk aversion regarding M&A transactions compared to non-family firms. By distinguishing between true family firms (TFFs) and lone founder firms (LFFs), the study investigates how ownership structures and the presence of family or founder CEOs influence the size of acquired target firms, using this as a proxy for risk-taking behavior in the German Prime Standard market.
- Analysis of risk behavior in True Family Firms (TFFs) vs. Lone Founder Firms (LFFs).
- Evaluation of target firm size as a reliable proxy for acquirer risk.
- Investigation of the impact of family CEOs and founder CEOs on M&A decision-making.
- Empirical assessment of 177 publicly listed German firms over the period 2009–2017.
- Differentiation between vulnerability risk and variability risk in strategic transactions.
Excerpt from the Thesis
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).
Summary of Chapters
1 Introduction: This chapter highlights the increasing academic focus on family firm risk behavior and outlines the research gap regarding different ownership structures and M&A activity.
2 Theoretical Background and Hypothesis Development: The chapter reviews existing literature on risk, defines TFFs and LFFs, and derives hypotheses concerning their M&A behavior and the impact of CEO types.
3 Methodology: The section describes the sample selection from the German Prime Standard, the variables used, and the random effects model applied for the statistical analysis.
4 Results: This chapter presents the empirical findings from the regressions, summarizing the impact of TFF, LFF, and CEO variables on target firm size.
5 Discussion: The implications of the findings are discussed, alongside the study's limitations and recommendations for future academic research.
6 Conclusion: This final chapter synthesizes the main findings, confirming that ownership and management modalities significantly shape the strategic M&A direction of firms.
Keywords
Family Firms, True Family Firms (TFF), Lone Founder Firms (LFF), Mergers and Acquisitions (M&A), Risk Aversion, Target Firm Size, Socioemotional Wealth (SEW), Family CEO, Founder CEO, Ownership Structure, Agency Theory, German Prime Standard, Strategic Decision-Making, Variability Risk, Vulnerability Risk.
Frequently Asked Questions
What is the primary objective of this thesis?
The thesis aims to analyze whether family-owned firms exhibit different risk preferences during M&A transactions compared to non-family firms, specifically focusing on the influence of the ownership structure and CEO type on the size of acquired target companies.
What are the central themes of the research?
The core themes include the distinction between True Family Firms (TFFs) and Lone Founder Firms (LFFs), the application of target firm size as a proxy for risk, and the impact of family versus founder leadership on corporate strategy.
What is the central research question?
The study investigates whether family firms are more risk-averse regarding M&A transactions and how specific leadership roles (family CEOs vs. founder CEOs) reinforce or alter these tendencies.
Which scientific methodology is utilized?
The author uses a quantitative approach, performing panel data regressions using a random effects model on a final sample of 177 publicly listed German firms (Prime Standard) for the period 2009–2017.
What topics are covered in the main body of the thesis?
The main body covers the theoretical development of hypotheses based on agency theory and SEW, a detailed methodology section on data collection and regression setup, and an empirical results section testing the impact of ownership and CEO status on M&A outcomes.
Which keywords best characterize this work?
Key terms include Family Firms, M&A behavior, Risk Aversion, Socioemotional Wealth (SEW), and Lone Founder Firms.
How is the distinction between a TFF and an LFF defined in this study?
A TFF is defined as a firm where multiple members of the same family hold at least 30% of the voting rights, whereas an LFF is defined by an individual founder holding at least 30% of the voting rights without other family involvement.
How does the presence of a family CEO affect the results found in the study?
The findings suggest that the presence of a family CEO reinforces the risk-averse tendency of TFFs, leading to a smaller target firm size in M&A transactions.
What contrast is highlighted between LFFs and TFFs in terms of M&A behavior?
While TFFs demonstrate risk aversion by avoiding large acquisitions, LFFs (specifically those with a founder CEO) are shown to be more risk-seeking, aiming for faster growth through larger M&A deals.
- Quote paper
- Thilo Wenig (Author), 2018, Are Family Firms More Risk Averse Regarding M&A Transactions?, Munich, GRIN Verlag, https://www.grin.com/document/491544
