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B. Variable definition
(a) Dependent variableAndrade et al. (2001) argue that companies could examine value creation or value demolition of M&A by observing the market reaction around the announcement. Thus, we use the event-study methodology to obtain the Cumulative Abnormal Return (CAR) as the indicator of M&A performance. Our calculations are based on OLS Risk-Adjusted Model, with the benchmarks of TSE and OTC market index return. The estimation period is [-375, -15] from the announcement and abnormal returns are accumulated over the different windows [0, 1], [-1, 1] and [-3, 3]
around the announcement.
(b) Independent variable
Independent variables include family firm status and the deviation between voting rights and cash flow rights. We manually identify family or nonfamily acquiring firms based on the information of the board structure, board members and share-holdings from TEJ as well as the news, articles and magazines. Moreover, the value of the deviation is calculated by TEJ.
1. Family firm status
The principles for identifying family firms are quite inconsistent. Some studies focus on the board structure since board members have the rights to determine the
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policies and the top executives of the firms; others put emphasis on the corporate ownership of voting rights (Lee and Liao, 2004; Barnes and Hershon, 1976; La Porta et al., 1999; Claessens et al., 2000; Faccio and Lang, 2002).
La Porta et al. (1999), Faccio and Lang (2002) argue that it is a family firm when a family or an individual own at least 20% of either the voting rights or ultimate control stakes. The threshold is 20% of the votes since this is generally enough to effectively control a firm (La Porta et al., 1999). Anderson and Reeb (2003) use both the fractional equity ownership of the families and (or) the board presence of family members to identify family firms.
Yeh1 (1999) mentions that it is a family firm if any of the two following conditions is satisfied: (1) A family, an individual or a firm controlled by the family own at least 10% of ultimate share-holdings; meanwhile, there is at least one family member in the board of director; (2) More than half of the board members are families. In our study, we use the principle raised by Yeh2 (1999) since their sample include Taiwanese corporations. Family firm status is defined as a dummy variable of the value equal to 1 when it is a family firm; 0 otherwise.
1 2
Please refer to ”葉銀華 (1999)，’家族控股、董事會組成與經營績效─台灣家族企 業管治機制之研究’，行政院國家科學委員會專題研究計畫成果報告。”
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2. Deviation
There are three ways to measure the deviation between voting rights and cash flow rights: (1) a dummy variable of the value equal to 1 when there is separation between control rights and ownership, 0 otherwise; (2) the difference between the level of voting rights and the level of cash flow rights; (3) the ratio of the level of voting rights respective to the level of cash flow rights (Claessens et al., 2002; Faccio and Lang, 2002). In our study, we use method (2) to calculate the deviation.
If the level of control rights exceeds the level of ownership, which means the higher deviation, large shareholders may tend to exploit the interests of minority shareholders through M&A transactions. It is because that the wealth of large shareholders will be less influenced by value destruction of M&A. Thus, the deviation between voting rights and cash flow rights is a common proxy variable to measure the conflicts between large and minority shareholders.
(c) Control Variable
In our multivariate analysis, we control for several variables which are identified in the papers as having the impacts on CARs. These variables can be broken down into two groups: (1) Firm characteristics of acquirers and targets, the former include firm size, book to market and prior return; the latter include public target; (2) Deal characteristics, such as year and mode of payment.
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1. Firm size
There are numerous studies indicating that the CARs of acquiring firms would be negatively affected by their firm size, which is called the size effect (Loderer and Martin, 1990; Schwert, 2000). Moeller, Schlingemann and Stulz (2004) also argue that small firms fare significantly better than large firms when making M&A announcement. On average, the abnormal returns obtained by small acquiring firms exceed the ones of large acquiring firms by 2.24%. In our study, we use natural log of the book value of total assets as of the calendar year-end prior to the announcement to measure firm size (Anderson and Reeb, 2003).
2. Book to market (BM)
In our study, we use the equity book to market ratio as of the calendar year-end prior to the announcement. Some studies argue that firms with low BM underperform after a merger and acquisition; on the contrary, firms with high BM experience superior performance. They conclude that it is because of “performance extrapolation” and “hubris”, which lead glamour firms to make relatively poorer acquisitions (Rau and Vermaelen, 1998).
3. Prior return
Our control variables include prior return, which is the sum of acquirers’
abnormal returns over the period from fifteen trading days prior to the
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announcement to three days prior to the announcement (Faccio, McConnell and Stolin, 2006). By controlling for this variable, we can exclude extraordinary returns caused by the events occurred prior to the announcement.
4. Public target
Weather target firms are public or private will influence the CARs of acquiring firms. Faccio, McConnell and Stolin (2006) show that average abnormal returns of acquirers of public targets are insignificantly negative, whereas average abnormal returns of acquires of private targets are significantly positive. The earlier research also takes the listed effect into consideration (Moeller et al., 2004). We set a dummy variable which equals to 1 for acquiring public targets; 0 for acquiring private targets.
5. Year after 2007
We control for year dummy which equals to 1 when the acquisitions occurred during 2007 to 2013; and 0 for those happened between 1999 and 2006.
6. Cash payment
There are evidences showing that mode of payment will influence acquirers’
performance (Andrade, Mitchell and Stafford, 2001). The average CAR gets higher when paying in stock for private targets and cash for public targets respectively (Chang, 1998; Travlos, 1987). Thus, we control for the payment by setting a dummy variable equal to 1 when the transactions are paid in cash; 0 for the stock payment.
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