Control Variables

Existing family firm studies and corporate acquisition literature identify a number of significant factors that affect acquirer announcement returns. Using these studies as a guide, these factors are included in the multivariate regression analysis as control variables. Relevant financial information for the measurement of these control variables is retrieved from the database – Capital IQ, as at the fiscal year-end that comes immediately before release of the corporate acquisition announcements. Information on acquisition-related traits is retrieved from the corporate acquisition announcements that are archived at the Announcement Section of Bursa Malaysia. The control variables that are used in this study are:-

i. Period of global financial crisis

Based on a recent corporate acquisition study (Banerjee et al. 2014), to control the period affected by the global financial crisis, the period of 2008 to 2011 is considered as a controlling factor. This is measured by using a dummy variable that equals to 1 when the event year of the period falls between the years 2008 and 2011. This variable is represented by Yr08_11.

ii. Free cash flow

Existing studies demonstrated significant relation between free cash flow and CAR. By referring to the literature (Lang et al. 1991), the same measurement for free cash flow is used. The variable is represented by FCF. The free cash flow is calculated as follows:

= (Operating Income + Depreciation – Interest Expenses – Taxes – Preferred dividend – Common dividend) / Total Assets

iii. Firm size

Moeller et al. (2004) indicate robust evidence of a strong relation between acquirer firm size and announcement-period abnormal returns of the acquirers. To control for firm size, firm size is measured by the log of market capitalisation (or market value of equity) (Vermaelen and Xu 2014). This variable is represented by LN_MVE.

iv. Firm age

The firm age is measured as the number of years since the year of firm’s incorporation (Anderson and Reeb 2003b; Villalonga and Amit 2006). This information is retrieved from the annual report and the official company website where the information and biography of the company are displayed. This variable is represented by FirmAge.

v. Proportion of Independent Directors on the Board

Empirical studies showed the significant positive relation between independent directors on the board and the announcement-period abnormal returns of the acquirers (Anderson and Reeb 2004). To control this effect, as done in previous studies, the variable Ind_Director is generated and denotes the total percentage of independent directors on the board. Information regarding the number of independent directors on the board is retrieved from either the Profile of Directors or the Statement of Corporate Governance in the annual report.

vi. Deal size

Recent findings reveal a significant negative relation between deal size and the announcement period abnormal returns of the acquirers (Alexandridis et al. 2013). To control this effect, following the work of Alexandridis et al. (2013), the deal size is measured as the log of the transaction value. The information is retrievable from the announcement. This variable is represented by LN_RM.

vii. Pre-announcement stock price run-up of acquirer

Previous studies documented that prior firm performance of the acquirer exhibits significant relation with announcement period abnormal returns (Masulis et al. 2007; Bae et al. 2002). Based on previous studies, the same measure is employed in this study. Acquirer’s pre-announcement stock price run-up is measured by cumulative abnormal return over the 200-day window (event day -210 to day -11) and is estimated using market model as specified in equation 5.3. This variable is represented by

Pre_CAR.

viii. Related industry acquisition

An existing study reports higher acquirer abnormal return for within-industry acquisitions (non-diversifying) compared with diversifying acquisitions (Maquieira et al. 1998). To control for whether the acquisition is within the same industry, a dummy variable is used to identify if the target and the acquirer are in the same industry. Related information is retrieved from the announcement on Bursa. This variable is represented by non_related.

ix. Other deal-related traits that are represented by a dummy value

There are several research findings on the significant relation between a few deal- related traits and the stock market’s response to corporate acquisition announcements. Following the literature (which has been discussed in Chapter 3), the effects of these traits are controlled using dummy variables, as discussed below:-

a. Acquisition payment method (cash, equity or mixed payment method) A dummy variable is created, which equals to one if acquisition is financed by equity payment, zero otherwise. This is represented by the variable

Equity.

b. Target type (privately-held target or public target)

A dummy variable is created, which equals to one if publicly held target is acquired, zero otherwise. This is represented by the variable Public.

c. Acquisition of domestic target or cross-border target

A dummy variable is created, which equals to one if non-domestic target is acquired, zero otherwise. This is represented by the variable Crossborder.

A summary of all the variables mentioned and their measurements are presented in

Table 5. 1 Summary Table Describing the Measurements for the Dependent, Independent and Control Variables

Dependent Variable

: Cumulative abnormal returns over the event window

Independent Variables

: Total family equity ownership as measured by total percentage of equity ownership in the company

: Squared

: Dummy variable that equals to one when family member of the controlling family is the CEO, zero otherwise

: Dummy variable that equals to one when founder is the CEO, zero otherwise : Dummy variable that equals to one when the heir is the CEO, zero otherwise : Dummy variable that equals to one when the ratio of total number of family

members on the board over total number of independent directors on the board is more than one, zero otherwise

: Dummy variable that equals to one when two related family members hold the positions of CEO and chairman respectively, zero otherwise

: Dummy variable that equals to one for related party acquisition, zero otherwise

Control Variables

: Firm age of the company

: Total percentage of independent directors on the board

: Dummy variable that equals to one when the position of CEO and chairman are both held by the same individual, zero otherwise

: Acquirer’s pre-announcement stock price run-up is measured by cumulative abnormal return over the 200-day window (event day -210 to day -11) and is estimated using market model

: Dummy variable that equals to one when target is not within the same industry as the industry of the acquirer

: Free cash flow ratio that is denoted by (Operating Income + Depreciation – Interest expense – Taxes – Preferred dividend – Common dividend) / Total Assets

: Firm size that is denoted by log of market capitalisation

: The transaction size that is denoted by the log of transaction dollar value of the acquisitions in Malaysia Ringgit currency

: Dummy variable that equals to one for acquisition of non-domestic target, zero otherwise

: Dummy variable that equals to one for acquisition of private target, zero otherwise

: Dummy variable that equals to one for equity-financed acquisition, zero otherwise

: Dummy variable that equals to one when the year of the event is during the period of 2008-2011, zero otherwise