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Separation of Ownership from Control and Acquiring Firm Performance: The Case of Family Ownership in Canada

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  • Walid Ben‐Amar
  • Paul André
Abstract
This study investigates the relationship between ownership structure and acquiring firm performance. A large proportion of Canadian public companies have controlling shareholders (families) that often exercise control over voting rights while holding a small fraction of the cash flow rights. This is achieved through the concurrent use of dual class voting shares and stock pyramids. Many suggest that these ownership structures involve larger agency costs than those imposed by dispersed ownership structures and that they distort corporate decisions with respect to investment choices such as acquisitions. We find that average acquiring firm announcement period abnormal returns for our sample of 327 Canadian transactions are positive over the 1998–2002 period. Cash deals, acquisitions of unlisted targets and cross‐border deals have a positive impact on value creation. Governance mechanisms (outside block‐holders, unrelated directors and small board size) also have a positive influence on the acquiring firm performance. Further, the positive abnormal returns are greater for family firms. We do not find that separation of ownership and control has a negative impact on performance. These results suggest that, contrary to other jurisdictions offering poor minority shareholder protection or poor corporate governance, separation of control and ownership is not viewed as leading to value destroying mergers and acquisitions, i.e., market participants do not perceive families as using M&A to obtain private benefits at the expense of minority shareholders. We do find a non‐monotonic relationship between ownership level and acquiring firm abnormal returns. Ownership of a majority of the cash flow rights has a negative impact on announcement returns. This is consistent with the view that large shareholders may undertake less risky projects as their wealth invested in the firm increases.

Suggested Citation

  • Walid Ben‐Amar & Paul André, 2006. "Separation of Ownership from Control and Acquiring Firm Performance: The Case of Family Ownership in Canada," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(3‐4), pages 517-543, April.
    • Handle: RePEc:bla:jbfnac:v:33:y:2006:i:3-4:p:517-543
    DOI: 10.1111/j.1468-5957.2006.00613.x
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    3. Kooyul Jung & Boyoung Kim & Byungmo Kim, 2009. "Tax Motivated Income Shifting and Korean Business Groups (Chaebol)," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(5-6), pages 552-586.
    4. Berinde Sorin & Rachisan Paula Ramona & Grosanu Adrian, 2012. "Qualitative Study Regarding The Relationship Between Corporate Governance And Creative Accounting," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 642-647, December.
    5. Dutta, Shantanu & Jog, Vijay, 2009. "The long-term performance of acquiring firms: A re-examination of an anomaly," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1400-1412, August.
    6. Fuad, Mohammad & Thakur, Vinod & Pattnaik, Chinmay & Jain, Rajesh, 2024. "Family firms and the mixed gamble perspective in cross-border acquisitions: A study of Indian firms," International Business Review, Elsevier, vol. 33(1).
    7. Mejbel Al-Saidi, 2020. "Kuwaiti Families and Firm Performance in Non-Financial Listed Firms," International Journal of Business and Social Research, LAR Center Press, vol. 10(3), pages 11-18, March.
    8. Sumon Kumar Bhaumik & Ekta Selarka, 2008. "Impact of M&A on firm performance in India: Implications for concentration of ownership and insider entrenchment," William Davidson Institute Working Papers Series wp907, William Davidson Institute at the University of Michigan.
    9. Slađana Savović, 2016. "The Post-Acquisition Performance Of Acquired Companies: Evidence From The Rebulic Of Serbia," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 61(209), pages 79-104, April - J.
    10. Chih-Yang Tseng, 2020. "Family firms and long-term orientation of SG&A expenditures," Review of Quantitative Finance and Accounting, Springer, vol. 55(4), pages 1181-1206, November.
    11. Clay Moffett & Mohammad Naserbakht, 2013. "Stock Price Behavior of Acquirers and Targets Due to M&A Announcement in USA Banking," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 18(1), pages 105-114, winter.
    12. Ng, Alex & Donker, Han, 2013. "Purchasing reserves and commodity market timing as takeover motives in the oil and gas industry," Energy Economics, Elsevier, vol. 37(C), pages 167-181.
    13. Ramiz ur Rehman & Inayat Ullah Mangla, 2010. "Corporate Governance and Performance of Financial Institutions in Pakistan: A Comparison between Conventional and Islamic Banks in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 49(4), pages 461-475.
    14. Maran Marimuthu & Haslindar Ibrahim, 2013. "A Case Study of the Local Bank Merger: Is the Acquiring Entity Better Off?," Accounting and Finance Research, Sciedu Press, vol. 2(2), pages 1-22, May.
    15. Paul André & Samer Khalil & Michel Magnan, 2007. "Termination Fees in Mergers and Acquisitions: Protecting Investors or Managers?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(3‐4), pages 541-566, April.
    16. Braun, Thorsten V. & Lehmann, Erik E. & Schwerdtfeger, Manuel T., 2011. "The stock market evaluation of IPO-firm takeovers," UO Working Papers 01-11, University of Augsburg, Chair of Management and Organization.
    17. Tao, Fang & Liu, Xiaohui & Gao, Lan & Xia, Enjun, 2017. "Do cross-border mergers and acquisitions increase short-term market performance? The case of Chinese firms," International Business Review, Elsevier, vol. 26(1), pages 189-202.

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