Essays on corporate finance and governance

Full text

(1)Yamin Xie Essays on Corporate Finance and Governance 299. founder-controlled targets. The first essay focuses on the value of founders to their founding firms and, hence, to the acquirers of such firms. I find significant differences between the acquirers of firms where founders remain and the acquirers of firms where founders leave. The acquirers of firms in which founders remain exhibit a higher Tobin’s q and greater cumulative abnormal returns, especially when founders remain as daily executives. The second essay mainly examines how the takeover premium of private firms is influenced by the decision to let the founder remain in the firm post-merger. I find significantly higher acquisition premiums and deal prices for those private target firms that are controlled by original founders, especially when the founders remain at their firms post-merger. The third essay provides a financial perspective for the career paths of personnel executives to CEO, and studies why so many COOs are promoted to CEO. This research reconciles both CEO turnover and internal promotion through an analysis of the new CEO selection conditional upon prior positions they have held. I identify key determinants that contain information of CEO’s ability to create value for shareholders. I find that internal COOs are more likely to become CEOs than CFOs and external candidates, and the likelihood is positively related to relative firm performance, executive rank and tenure.. HANKEN SCHOOL OF ECONOMICS HELSINKI ARKADIANKATU 22, P.O. BOX 479 00101 HELSINKI, FINLAND TEL +358 (0)9 431 331. FAX +358 (0)9 431 33 333 ISBN 978-952-232-306-4 (printed) ISBN 978-952-232-307-1 (PDF) ISSN-L 0424-7256 ISSN 0424-7256 (printed) ISSN 2242-699X (PDF) juvenes print, tampere. VAASA kirjastonkatu 16, P.O. BOX 287 65101 VAASA, FINLAND TEL +358 (0)6 3533 700. FAX +358 (0)6 3533 703 biblioteket@HANKEN.FI HANKEN.FI/DHANKEN. Yamin Xie – Essays on Corporate Finance and Governance. This dissertation contains three essays on corporate finance and governance which cover a range of topics including: entrepreneurial finance, mergers and acquisitions, financial performance, family ownership, private ownership, ownership change, agency problem, managerial incentives, and management labor markets. In the first two essays, I examine how corporate governance (e.g., family ownership, private ownership and ownership change) affects corporate finance (e.g., financial performance ROA, stock returns, investment opportunities Tobin’s q and firm valuation). In the third essay, I examine how corporate finance (e.g., relative financial performance) affects corporate governance (e.g., CEO turnover and appointment, executive promotion, and incentive mechanism). The first two essays focus on a specific M&A target market and link to entrepreneurial finance. I investigate the founder-controlled firms that are 100% acquired, and examine acquirer performance in cases where the founder remains in the firm post-merger. This research stems from separation of ownership and management in classical agency theory and entrepreneurial theory, and aims to fill the gap about the transition from owners to agents after founders sell their firms in a new corporate governance mechanism. In the first essay, I consider public foundercontrolled targets and in the second essay I study private. ekonomi och samhälle Economics and Society. Essays on Corporate Finance and Governance Yamin Xie.

(2) Ekonomi och samhälle Economics and Society Skrifter utgivna vid Svenska handelshögskolan Publications of the Hanken School of Economics. Nr 299. Yamin Xie. Essays on &orporate )inance and *overnance. Helsinki 2016 <.

(3) Essays on &orporate )inance and *overnance. Key words: merger performance, founding firm, remaining founders, q theory, cumulative abnormal return, family firm, private firm, founder premium, CEO selection, chief operating officer, internal promotion, external recruitment, managerial ability, relative firm performance, executive rank, tenure © Hanken School of Economics & Yamin Xie, 2016. Yamin Xie Hanken School of Economics Department of Finance & Statistics P.O.Box 479, 00101 Helsinki, Finland. Hanken School of Economics ISBN 978-952-232-306-4 (printed) ISBN 978-952-232-307-1 (PDF) ISSN-L 0424-7256 ISSN 0424-7256 (printed) ISSN 2242-699X (PDF). -XYHQHV3ULQWSuomen Yliopistopaino OY, Tampere, 2016.

(4) i. ACKNOWLEDGEMENT It is a great and meaningful journey to do my favorite research in the PhD program at the Department of Finance and Statistics at the Hanken School of Economics in Helsinki. Foremost, I would like to thank my degree supervisor Professor Anders Löflund for providing formal supervision meetings, valuable support, helpful comments and all his efforts on handling the issues related to my dissertation and graduation process. I’m very grateful to my thesis supervisors Professor Timo Korkeamäki and Professor Benjamin Maury for their spending time, efforts and giving valuable comments on my thesis. I particularly want to express my profoundest gratitude to Professor Timo Korkeamäki for his tremendous support, high responsibility and professional guidance along the way of research during these years which can always inspire me and bring me to a higher level of thinking. I always get his feedback promptly even in the weekend and holiday. What I learn from Professor Timo Korkeamäki is not only how to write papers to meet the graduation requirement, but also how to do good research and publication in a professional way. I’m very grateful to the external examiners Professor Mervi Niskanen and Professor Martin Holmen of my thesis, and their comments have really developed and strengthen my essays. I am very thankful to Mikko Leppämäki who has provided well-structured courses and seminars with some of the leading professors through the Graduate School of Finance which is very important for our scientific research and scholarly communication. I highly appreciate Gönul Colak for his insightful comments on my papers for future research. I am pleased that we will cooperate on subsequent research. I also have had the joy of working with all my colleagues and I wish to thank them: Niklas Ahlgren, Eva Liljeblom, Tom Berglund, Jan Antell, Paulo Maio, Kajsa Fagerholm, Karl Felixson, Henrik Palmen, Gunnar Rosenqvist, Susanna Taimitarha, Anders Ekholm, Peng Wang, Peter Nyberg, Salla Pöyry, Kun Huang, Zhamilya Assilbekova, Sergey Osmekhin, Ville Savolainen, Fredrik Huhtamäki, Syed Mujahid Hussain, Agnieszka Jach, Magnus Blomkvist, Niclas Meyer, Nader Virk, Danielle Xu, Khurram Javed, Abu Shaker, Mo Zhang, John Pettersson, Paul Catani, and many others. I am indebted to my family. I thank my father Ruyuan Xie, mother Xitao Li and brother Chupeng Xie for their encouragement and support in many stages of my life. I thank my husband Meng Wei, and our sons Ercheng Wei and Haochen Wei for their understanding and patience during this journey. I thank my parents-in-law Xiangzhi Wei and Wenxu Zhang for their help. I also thank my many friends. Financial support from Hanken Foundation and Wallenberg Center for Financial Research is gratefully acknowledged. March 28, 2016 Yamin Xie.

(5) ii. CONTENTS PART A: THEORETICAL CONTEXT AND CENTRAL FINDINGS. 1 INTRODUCTION.......................................................................................1 2 RELATED LITERATURE REVIEW ......................................................... 5 2.1. Founders, family firms and firm value in M&A .................................................. 5. 2.2. Private founder-controlled firms in M&A ...........................................................6. 2.3. Performance driven CEO selection ..................................................................... 7. 3 SUMMARY AND CONTRIBUTIONS OF THE ESSAYS ......................... 9 3.1. Essay 1: Acquirer performance when founders remain in the firm ....................9. 3.2. Essay 2: Founder premium and acquirer returns of private targets................. 10. 3.3. Essay 3: Relative performance, tenure and COO promotion in CEO selection 11. REFERENCES ............................................................................................ 12 PART B: THE ESSAYS …………………………………………………………………….17 Essay 1...............................................................................................................................18 Xie, Yamin, “Acquirer performance when founders remain in the firm”, (2015) PacificBasin Finance Journal 35, Part A, 273-297 Essay 2..............................................................................................................................43 Xie, Yamin, “Founder premium and acquirer returns of private targets”, Manuscript, Hanken School of Economics Essay 3..............................................................................................................................79 Xie, Yamin, “Why are so many COO promoted to CEO? Relative performance, executive rank, tenure and COO promotion in CEO selection”, Manuscript, Hanken School of Economics. Acknowledgement: Reprinted from Publication Pacific-Basin Finance Journal, Vol 35 / Part A, Xie, Yamin, Acquirer performance when founders remain in the firm, Pages No. 273-297, Copyright (2015), with permission from Elsevier..

(6) iii. Part A: THEORETICAL CONTEXT AND CENTRAL FINDINGS.

(7) 1. 1. INTRODUCTION. This dissertation contains three essays on corporate finance and governance. The first essay studies the founders of publicly traded firms in Mergers & Acquisitions (M&A) and acquirer performance when founders remain in the firm. The second essay examines the founders of privately held firms in Mergers & Acquisitions and whether there exists a founder premium on deal price and acquirer returns. The third essay investigates determinants for internal promotion and external recruitment in CEO selection. The background of the first two essays is the linkage between entrepreneurial finance and M&A. For most successful entrepreneurial firms, a time comes for the founders to relinquish control (Burkart, Panunzi, and Shleifer, 2003). Founder-controlled firms are often targets of mergers and acquisitions (M&As). Many founders pursue selling their firms rather than appointing a successor or a manager to conduct operations. Some founders who sell also remain in the firm after merger. For entrepreneurs, venture capitalists, and other investors in private founder-controlled firms, takeovers are an important means of capital operation and an effective exit option along the IPO option. Furthermore, for entrepreneurial firms, acquisitions can widen financing opportunities, facilitate entrepreneurial activities, increase business efficiency, and thus promote economic growth. In particular, the importance of takeovers may increase substantially when IPO markets are facing constraints. Although various studies have addressed entrepreneurial firms, few have focused on the effects of founders in merger cases. The main purpose of the first two essays is to examine acquirer performance in cases where the founder remains in the firm post-merger. There is little research concerning the founder’s decision to remain in the firm and the value of the founders to the acquirers. Founders can add value through a combination of specialized knowledge, concentrated and long-term ownership, and non-pecuniary (e.g., reputational and emotional) ties to the firm (e.g., Demsetz and Lehn, 1985; James, 1999). They can thus be viewed as a unique group who are hard-working (Puri and Robinson, 2007, 2010), endogenously entrenched, and unresponsive to increases in pay (Palia and Ravid, 2003), unlike typical employees or managers. Accordingly, founders could be particularly attractive assets from the view of acquirers. The unique personality traits of founders can increase productivity (Puri and Robinson, 2010) and lead to “benevolent entrenchment” reflected in a higher value (Palia and Ravid, 2003). They can thus contribute significantly by remaining in the firm post-merger. From above, the acquiring managers’ decision to let the founder stay in the merged firm may include various reason: (1) Remaining founders can be the “confidence symbol” that reduces the high turnover rates in acquired management teams and offer management and operational synergies to merged firms (Walsh, 1988); (2) Remaining founders may reduce agency costs since founder firms typically have limited agency conflicts (e.g., Anderson,Mansi, and Reeb, 2003), and founders are likely to continue their principal responsibility because of an attachment to the firm; (3) Remaining founders can help form a creative environment and an effective corporate culture. The first two essays focus on a specific M&A target market. I investigate the foundercontrolled firms that are acquired and 100% owned by the acquirers post-merger. The main difference between the first essay and the second essay is the different object of study. In the first essay, I consider public founder-controlled targets and in the second essay I study private founder-controlled targets. I define a founding firm as a firm that identifies its original owner(s). Active founders are defined as individuals with an active.

(8) 2. position in management or the board of the firms they have founded until the moment of the merger. Remaining founders are defined as those either remaining in management or retaining a board position post-merger. I investigate the value of founders to their founding firms and, hence, to the acquirers of such firms. The main research question in the first essay is: Do acquirers exhibit superior performance postmerger when founders remain? This question may have several implications from founders remaining or leaving: (1) founders might be more or less forced to leave after a merger especially when the merger is hostile; (2) when founders are allowed to remain in the firm and expected to improve firm performance, they may voluntarily choose to leave or remain in the firm; (3) when founders primarily want to leave the firm, but the acquiring managers ask them to remain in the firm and founders can decide whether to remain or leave; (4) when founders finally decide to remain in the firm, they may have private information. This question stems from separation of ownership and management in classical agency theory and aims to fill the gap about the transition from owners to agents after founders sell their firms. This study focuses on how founders (entrepreneurs) behave as agents in a new corporate governance mechanism and whether this transition from owners to agents can improve financial performance. The main research questions in the second essay are: Do acquirers pay higher prices for private founder-controlled firms, particularly when founders are active prior to a merger and remain at the firm thereafter? Do acquirers gain more from acquiring firms with founder presence? This question mainly examines how the takeover premium of private firms is influenced by the decision to let the founder stay in the firms after the takeover. This question is derived from private ownership, family firm and entrepreneurial literature, and aims to fill the gap of private founder in M&A by combining “private”, “family” and “founder” effects on takeover premium and firm performance. The motivations for publicly listed entrepreneurial firms are different from the motivations of privately held ones as they may face different choices. Founders of publicly listed entrepreneurial firms who would like to relinquish control may face the choice between selling the firm, and appointing a successor or manager to conduct operations. However, most founders of privately held entrepreneurial firms may face the choice between selling the firm and IPO, irrespective of appointing a successor. Furthermore, the two types of firms may have different characteristics due to “public” and “private” ownership. For instance, Anderson, Duru and Reeb (2009) find that both the founder and heir firms are significantly more opaque than diffusive shareholder firms. Private firms may face different liquidity problems than public firms due to different financing channels (Chang, 1998). Ownership, control, and voting rights are typically more concentrated in private firms than in public firms, which may endow private founders with greater bargaining power (Draper and Paudyal, 2006). These characteristics may have different impact on founders’ decision to sell the firms and remain in the firms. Moreover, private firms may have more private information than public firms. Private firms encountering more information asymmetry are more likely to exit through an acquisition than through an IPO (Chemmanur, He, and Nandy, 2011; Bayar and Chemmanur, 2012b). In addition, public and private firms may have different pricing mechanism that could impact deal prices and acquirer returns. These complicate differences between publicly listed entrepreneurial firms and privately held entrepreneurial firms are best investigated in two separate papers in order to explore the particular issues more deeply. Considering the different ownership types of public and private firms, I adopt different methodologies to test the impact of public founders and private founders on acquirers in mergers from different perspectives. For public founder-controlled targets, I pursue.

(9) 3. two potential endogeneity problems: Do founders sell poor quality firms? Do founders remain in high performing firms? The main measure of acquirer performance is the change of Tobin’s q in merger from one year before announcement to one year after completion. I use instrumental variable method to deal with these endogeneity problems. I derive instrumental variables from Adams et al. (2009) and involve the situation when a founder leaves the firm: one instrument is “number of founders” that is directly adopted from Adams et al. (2009), and another instrument is “early incorporation” that is a coarse proxy for the "dead founders" instrument of Adams et al. (2009) and derived by Fahlenbrach (2009). As a robustness check, I also consider acquirer’s announcement returns. For private founder-controlled targets, I focus on the deal price and acquirer returns. For each study, I compare the acquisitions of founding (or family) targets with remaining founders post merger, the acquisitions of founding (or family) targets with active founders prior to a merger, the acquisitions of general founding (or family) targets and the acquisitions of non-founding (or non-family) targets. The goals are to provide insights into founder-controlled targets in mergers and to explore the effects of founders on acquirer performance. These two essays have economic and practical implications for acquiring firms, founder-controlled firms, venture capital or private equity partners, other M&A participants, and academics. The third essay studies CEO selection. A suitable CEO can provide value by formulating and implementing strategies and policies that enhance firm value (Dikolli, Mayew and Nanda, 2014). Prior performance is relevant in CEO selection since firm performance contains information of CEO’s ability to create value for shareholders (Dikolli, Mayew and Nanda, 2014). In addition, potential promotion is a form of incentive that can induce efforts from executives (Chan, 1996). This essay focuses on the background of potential candidates for the CEO position. In contrast to most prior literature that focuses on CEO turnover or separately studies internal promotion (e.g., Eisfeldt and Kuhnen, 2013; Mobbs and Raheja, 2012), this study essentially reconciles both CEO turnover and internal promotion through an analysis of the new CEO selection conditional upon prior positions they have held. Analyzing a sample of 1185 new CEO appointments, I investigate the frequency distribution of their prior positions which include internal and external COO, CFO, and CEO. I find that internal COOs are most likely to become their firms’ new CEOs. More than 75 percent of the new Chief Executive Officers (CEOs) are promoted from their positions as Chief Operating Officers (COO) within their companies, whereas only about 10 percent of the new CEOs are former Chief Financial Officers (CFO) within their companies. Moreover, only about 10 percent of the new CEOs are recruited externally. Despite the large proportion of promotions of COOs, there is almost no research on such internal COO to CEO promotion. Due to the increasing importance of managerial heterogeneity (e.g., Kaplan, Klebanov, and Sorensen, 2012) and CEO work experience (e.g., Custódio and Metzger, 2014; Custódio, Ferreira, and Matos, 2013), an examination of COO promotions to CEO is important. Thus, the main research question in the third essay is: Why are so many COOs promoted to CEO? This question is derived from CEO turnover and internal promotion literature, and aims to fill the gap of the career paths of personnel executives to CEO from a financial perspective. Since CEOs are mainly appointed from internal COOs and CFOs, this question pays more attention to the choice between the COO and the CFO at internal recruitment of a new CEO. I investigate why internal COOs are the dominant candidate pool in selection of the new CEO. I identify and evaluate key determinants for candidate promotion and the extent to which they influence the COO promotion decision..

(10) 4. According to standard agency theory, evaluating managers on the basis of their relative performance may push the board to replace underperforming CEOs with other executives to maximize shareholders value (Holmstrom, 1982; Jenter and Kanaan, 2015). CEO turnover has attracted lively great deal of research interest, and the main driver appears to be relative performance (e.g., Albuquerque, 2009; Eisfeldt and Kuhnen, 2013; Jenter and Kanaan, 2015; Parrino, 1997; Kaplan, Klebanov and Sorensen, 2012). Since the former CEOs may be fired because of relative underperformance, the new CEOs could be selected because of relative outperformance. Further, tenure may also affect CEO selection (e.g., Allgood and Farrell, 2000; Dikolli, Mayew and Nanda, 2014; Brookman and Thistle, 2009). Firm performance is typical equal for internal candidates since firm-level performance tends to be monitored instead of departmental or subsidiary performance. Thus hierarchical rank and tenure play an important role in distinguishing between internal COOs and internal CFOs in the promotion to CEO (Dikolli, Mayew and Nanda, 2014). Accordingly, it raises the natural sub-questions: Is the COO promotion to CEO driven by relative past firm performance? Are hierarchical rank and tenure the key factors for internal COOs winning out over internal CFOs in promotions to CEO position? I consider jointly prior management positions, relative performance, and hierarchical rank and tenure of CEO candidates to explore the determinants of CEO selection and COO promotion. This essay has implications for the design of executive promotion, CEO selection, and corporate governance. In this introduction, I provide an overview of the relevant theoretical background to the main research questions that I examine. I also present and discuss the core findings of each essay. The rest of the introduction proceeds as follows. Section 2 provides a brief theoretical background. Section 3 presents the main results and contributions of each essay..

(11) 5. 2. RELATED LITERATURE REVIEW. I develop my essays in the corporate finance and governance framework and contribute to our understanding of a range of topics including: entrepreneurial finance, mergers and acquisitions, financial performance, family ownership, private ownership, ownership change, agency problem, managerial incentives, and management labor markets. Previous corporate governance literature mainly studies four main streams of agency problems: (1) separation of ownership and management, (2) conflicts between owners and lenders, (3) conflicts between dominant and minority shareholders and, (4) altruism (e.g., Block, 2012; Villalonga, Amit, Trujillo and Guzmán, 2015). Corporate finance and governance are closely linked and interacted since corporate governance may have an impact on corporate finance (e.g., financial performance), and corporate finance (e.g., financial policy, capital structure, merger and acquisition, and entrepreneurial activities) may also affect governance mechanism. My essays mainly focus on the first agency problem of corporate governance: separation of ownership and management. In the first two essays, I examine how corporate governance (e.g., family ownership, private ownership and ownership change) affects corporate finance (e.g., financial performance, stock return, investment opportunities Tobin’s q and firm valuation). In the third essay, I examine how corporate finance (e.g., relative financial performance ROA and stock return) affects corporate governance (e.g., CEO turnover and appointment, executive promotion, and incentive mechanism). I further develop corporate governance related management literature on the career paths of personnel executives to CEO (e.g., Forbes, B., Piercy, J. 1991) from a financial perspective. This section presents an overview of the relevant theoretical background and related literature for the essays. Firstly, I summarize the related literature on foundercontrolled firms, family firms, entrepreneurs and firm value in mergers and acquisitions (M&A). Secondly, I present the existing research concerning characteristics of private targets in M&A and how they relate to family firms and founders. Finally, I provide an overview of relevant literature on performance driven CEO selection and link it to COO promotion. 2.1. Founders, family firms and firm value in M&A. Several studies investigate the links among founding firms, founders, and Tobin’s q. Most studies demonstrate that founder-controlled founding firms have higher Tobin’s q (e.g., Morck, Schleifer, and Vishny, 1988; Anderson and Reeb, 2003; Palia and Ravid, 2003; and Villalonga and Amit, 2006). Finance literature suggests that managerial ownership by the founders or the founding family has a positive effect on firm value (e.g., Fama and Jensen, 1983; Jensen and Meckling, 1976; Li and Srinivasan, 2011; Adams, Almeida, and Ferreira, 2009; Anderson and Reeb, 2003; Palia and Ravid, 2003), and that reduction in ownership reduces firm value (e.g., Stulz, 1988; Villalonga and Amit, 2006). Villalonga and Amit (2006) posit ‘‘control discount’’ and find that the negative impact on the control value significantly reduces the “founder premium” by 0.98 in q or by 0.76 in industryadjusted q, and founder-CEO firms with control-enhancing mechanisms are approximately 25% more valuable than non-family firms (Villalonga and Amit, 2006). From the classical agency and ownership theories perspective, founders are the principal owners of their founding firms before a merger, whereas they become agents after a merger when they remain in the firm. Thus, the possible agency cost may reduce.

(12) 6. the acquirer’s firm value. Accordingly, in cases where the founder sells the firm and exits, the significant ownership change and control discount tends to reduce firm value (e.g., Stulz, 1988; Villalonga and Amit, 2006). However, in cases where founders sell firms and remain, they retain significant control, and mitigate the negative effect of ownership change and control discount on firm value. Furthermore, founders as a unique group of optimistic entrepreneurs that possesses special personality traits can increase productivity (Puri and Robinson, 2010) and thus lead to “benevolent entrenchment” reflected in a higher Tobin’s q (Palia and Ravid, 2003). Moreover, Nicolaou, Shane, Cherkas, Hunkin, and Spector (2008) find causality between the relationship of genetic factors and entrepreneurship. The above studies further suggest that personality and entrepreneurial spirit do not change according to an individual’s external condition (e.g., ownership change, role change, and firm change). However, a remaining founder could cause frictions once the firm is controlled by someone else especially when corporate culture and management philosophy are different. For remaining founders, they may need time to acclimate. For the merged firms, they also need time to achieve cultural fusion and management alignment. Thus research between the remaining period and merger performance becomes meaningful. In sum, founders are motivated by personal passion and entrepreneurial spirit, and therefore they improve firm value beyond the ownership obligations. Remaining founders are likely to continue their principal responsibility due to an attachment to the firm. Additionally, remaining founders offer management and operational synergies to merged firms, act as a “confidence symbol”, and reduce the otherwise high turnover rates in acquired management teams (Walsh, 1988). Therefore, it is feasible for remaining founders to transfer synergies and create value to acquirers. 2.2. Private founder-controlled firms in M&A. Prior literature studies how private targets differ from their listed counterparts when it comes to deal prices and acquirer returns (e.g., Chang, 1998; Fuller, Netter, and Stegemoller, 2002; Faccio, McConnell, and Stolin, 2006; Capron and Shen, 2007). Related perspectives include liquidity, information asymmetries, agency problems, bargaining power, and merger synergies (e.g., Chang, 1998; Draper and Paudyal, 2006). These are possible reasons for private firms to be sold in a takeover rather than in an IPO (e.g., Brau, Francis and Kohers, 2003; Poulsen and Stegemoller, 2008; Chemmanur, He, and Nandy, 2011; Bayar and Chemmanur, 2012b). In particular, several studies investigate the characteristics of private family firms (e.g., agency costs, family roles, ownership structure, and board structure) and their effects on firm value (e.g., Schulze, Lubatkin, Dino and Buchholtz, 2001; Chrisman, Chua, Kellermanns and Chang, 2007; Che and Langli, 2015). Thus private family firms combine “private” and “family” characteristics that may play a central role on firm performance and differ from family or private firms separately. Private firms are typically more illiquid than public firms (e.g., Draper and Paudyal, 2006; Officer, 2007). The illiquidity problem is an important consideration for entrepreneurs when choosing between private and public ownership (Boot, Gopalan, and Thakor, 2006). Brau, Francis, and Kohers (2003) find that deals involving greater selling liquidity are more likely to utilize a takeover rather than an IPO. Private family firms have bargaining power relative to public firms due to their close control (e.g., Draper and Paudyal, 2006). For instance, families or founders can choose the timing of any sale and the buyer to whom they would prefer to sell. Private targets have serious.

(13) 7. information asymmetries (Officer, Poulsen, and Stegemoller, 2009). Hertzel and Smith (1993) reveal that private firms have more serious information costs than public firms which may cause private discounts. Anderson, Duru and Reeb (2009) confirm that both founder and heir firms are significantly more opaque than diffusive shareholder firms, indicating that the information asymmetry problem is more serious in family firms. Moreover, when founders are active and remain in the firm post-merger, they serve as voluntary monitors and play an oversight role due to their “benevolent entrenchment”, and hence reduce agency costs and increase the firm value (e.g., Jensen and Meckling, 1976; Fama and Jensen, 1983; Palia and Ravid, 2003). In addition, active and remaining founders may be important sources of operational synergies to drive value growth due to their emotional ties to the targets (Xie, 2015) and generate synergistic gains for acquirers (Wang, C., Xie, F., 2009). There is thus a tradeoff between the “private effect” and the “founder effect” caused by the characteristics from both aspects. Although some literature argues that private ownership and family ownership may increase agency costs due to conflicts of interests originating from within families such as sibling rivalries, identity conflicts and private goals (e.g., Eddleston and Kellermanns, 2007) and less external governance (Schulze, Lubatkin, Dino and Buchholtz, 2001), selling the family firm should reduce information asymmetries and improve altruism since family agents may have less incentive to compete with each other after control change (Schulze, Lubatkin and Dino, 2003). After selling firms, private family managers may behave as agents who are expected to work under agency cost control mechanism, and this will improve performance (Chrisman, Chua, Kellermanns and Chang, 2007). In such cases, remaining founders could cause frictions in management and operation once the firms are controlled by someone else especially when corporate culture and management philosophy are different. For example, active founders may have a strong negative effect on the leverage ratio (Ampenberger, Schmidt, Achleitner, Kaserer, 2011) and a strong positive effect on the R&D investment (Block, 2012). Thus remaining founders may make difference in corporate governance and finance. Many founders of private firms choose to sell their firm in an M&A deal instead of conducting an IPO (Bayar and Chemmanur, 2012). Previous literature documents that acquiring private targets with a price discount (Cooney, Moeller and Stegemoller, 2009) can garner positive shareholder returns (e.g., Hertzel and Smith, 1993; Wruck, 1989; Chang, 1998). However, in cases where the target private family firm sells at a price premium, whether the acquirers garner positive abnormal returns ex post remains to be examined. If this is the case, the price premium would not indicate an overpayment, but a value premium instead. Entrepreneurial theory predicts that founders’ congenital traits and entrepreneurial spirit lead to a higher firm valuation in mergers, irrespective of ownership changes (e.g., Isakov and Weisskopf, 2014). When founders are active and remain with the firm, their role as “value drivers” can continue. Thus, the market increases its corresponding valuation and price premium. 2.3. Performance driven CEO selection. Prior research documents that poor performance is connected to CEO turnover (e.g., Albuquerque, 2009; Eisfeldt and Kuhnen, 2013; Jenter and Kanaan, 2015). Underperforming CEOs are more likely to be fired because shareholders believe that they are ineffective in formulating and implementing strategies and policies that enhance firm value (Dikolli, Mayew, and Nanda, 2014). Evaluating managers on the basis of their relative performance may push the board to replace underperforming.

(14) 8. CEOs with other executives in order to maximize shareholder value (Holmstrom, 1982; Jenter and Kanaan, 2015). Industry-adjusted performance is a widely adopted relative performance measure (e.g., Kaplan and Minton, 2012; Mobbs and Raheja, 2012) because it provides corporate boards a means of obtaining more precise measures of CEO performance by filtering out exogenous shocks that affect all firms in an industry or market (Parrino, 1997). Parrino finds that the median industry-adjusted ROA and stock return are both lower during the year prior to the appointment of a new CEO. However, Jenter and Kanaan (2015) highlight the importance of industry performance in relative performance evaluation and reveal that CEOs are significantly more likely to be replaced after poor industry performance and, to a lesser extent, after poor stock market performance due to shareholder pressure. Underperforming CEOs are thus more likely to be replaced in times of poor performance by either the firms or their industries. Relative firm performance plays an important role when the boards face a choice between internal and external candidates (e.g., Huson, Malatesta, and Parrino, 2004; Palomino and Peyrache, 2013). Outsiders are appointed when the benefits of having an outsider are likely to be significantly greater than those of the best insiders as a result of their outperforming peer firm (e.g., Chan, 1996; Agrawal, Knoeber, and Tsoulouhas, 2006; Parrino, 1997). The promotion to CEO is different from other promotions because CEOs need to confront complex business environments and are therefore required to possess more strategic skills and general abilities to oversee a whole firm (Mobbs and Raheja, 2012; Murphy and Zabojnik, 2004; Custódio, Ferreira, and Matos, 2013). Since managerial ability is hard to observe, executive rank is a potential proxy for that. It can be assumed that higher ranking managers possess superior general abilities (Prasad, 2009; Ferreira and Sah, 2012). Moreover, a higher executive rank would indicate more relevant experience on managing a whole firm. A rank close to the CEO may imply a higher probability of being promoted to CEO. In addition, the management positions of top executives are more relevant for overall firm performance and policy (e.g., Custódio and Metzger, 2014; Kuang, Qin, and Wielhouwer, 2014). Some positions may consistently have a higher probability of being promoted to CEO than others at the same hierarchical level (Clemens, 2012). However, the higher ranked positions are not necessarily a “fast track” for promotion, as “close track” positions with cumulative managerial ability and work experience may be a more dominant CEO succession channel. The root cause might be attributed to management responsibilities of some positions that are closely related to the required managerial ability of CEO position. The connection between management position and hierarchical rank may be able to explain such phenomenon in CEO promotion. Tenure may capture more credible and superior ability related to past performance (Dikolli, Mayew, and Nanda, 2014). Brookman and Thistle (2009) show that better relative performance increases expected tenure. Long-tenured executives should already have proven their skills in both good and bad times (Jenter and Kanaan, 2015). Moreover, tenure implies that individuals have gone through a learning process to obtain their managerial abilities (Pan, Wang, and Weisbach, 2015). In addition, shareholders’ assessment of CEO ability becomes increasingly precise over a longer tenure period (Dikolli, Mayew, and Nanda, 2014). Tenure may explain a dynamic process over time not only for executives to accumulate work experience and improve managerial ability, but also for owners and the board to judge which candidate is a better match for the CEO position. Thus, internal executives with longer tenures are more likely to become CEOs..

(15) 9. 3. SUMMARY AND CONTRIBUTIONS OF THE ESSAYS. This thesis consists of three essays. This section provides an overview of the essays. The overall implication for these three essays is that human capital such as founders (also entrepreneurs) and chief executives plays an important role in corporate finance and governance. The transition of founders from owners to agents when founders remain in the firm post merger has practical implications for acquirers of family and founder firms because the role players in corporate governance change due to ownership transfer. The circumstances are different between public and private ownership, and depend also on the presence of founders during mergers. One important implication from remaining founders is that founders as entrepreneurs may be not restricted in the ownership framework since their entrepreneurial spirit and orientation may beyond ownership change. Another implication is that remaining founders may behave under agency cost control mechanism after they sell their firms due to separation of ownership and management, and this may improve performance (Chrisman, Chua, Kellermanns and Chang, 2007). The important implication of the third essay is that it provides a financial perspective for the career paths of personnel executives to CEO. 3.1. Essay 1: Acquirer performance when founders remain in the firm. Using US data from January 1, 1992 to December 31, 2012, this study investigates two issues. First, it examines the relationship between the firm founding status and acquirers’ merger performance. I explore whether founding firms can transfer their high valuation to acquirers. Second, this study examines the relationship between the remaining founders in control of the firm, and acquirers’ post merger performance. However, the decision for founders to sell or remain in control of the firm could be based on private information on the real status of the firm. Founders may sell poor quality firms and remain in high performing firms. Information asymmetry increases the acquirer’s likelihood of buying a poor quality firm. Thus, this study addresses two potentially endogenous factors: Do founders tend to sell poor quality firms? Do founders remain in high performing firms? The two endogeneity problems are united in founders’ private information concerning the founding firms. I use instrumental variables “target number of founders” proposed by Adams et al. (2009) and “early incorporation” proposed by Fahlenbrach (2009) to test these two endogeneity problems. I find that acquisition of target founding firms has a negative impact on acquirers’ Tobin’s q, whereas remaining founders in target firms have a positive impact on acquirers’ Tobin’s q. This demonstrates the value of founders. I find evidence of a “founder premium,” showing that acquirers with remaining target founders achieve greater q growth than the acquirers without remaining target founders. I also find that acquirers of firms where founders remain as “daily executives” exhibit higher Tobin’s q than acquirers of firms where founders remain as “non-daily directors”. Moreover, the length of time that the founders remain post-merger also appears to affect valuation. The founder remaining period has a negative effect on acquirers’ Tobin’s q growth, but a positive effect on acquirers’ cumulative abnormal return. The quadratic fit between the remaining period and the acquirer’s ο is graphed as a U curve, indicating that the acquirer’s ο decreases in the first stage, and then increases in the second stage. The results for acquirer’s cumulative abnormal return (CAR) are generally consistent with the results on acquirer’s Tobin’s q. I find that remaining target founders have a positive influence on the acquirer’s CAR. Moreover, acquirers gain the greatest CAR when they.

(16) 10. purchase founding firms in which founders remain as daily executives, but lose CAR when they purchase non-founding firms and founding firms from which founders leave. In conclusion, this study has significant implications concerning the acquisition of founding firms. My findings suggest that acquirers need be cautious when purchasing founding firms, and that firm founders should be encouraged to remain in the firms. This study addresses gaps in several research areas. First, I extend the literature on founder-controlled firms with respect to M&As. The prior literature has focused mainly on founder-controlled acquirers, whereas I address founder-controlled targets. Second, I add to the research concerning founders’ value to acquirers and extend the prior literature beyond the focus on founders’ value to their founding firms. My study makes four significant contributions. First, I establish a link between founding targets and acquirers’ merger performance. Second, I provide an insight into the sale of founder-controlled firms with remaining target founders. Third, I explore the effect of remaining target founders on acquirers’ firm value and stock returns. Finally, I document a robust positive relationship between remaining target founders and acquirers’ merger performance. 3.2. Essay 2: Founder premium and acquirer returns of private targets. In this study I investigate takeover premiums and acquirer’s return of U.S. acquisitions of private founder-controlled firms. Prior literature claims that private premiums on returns may be attributed to private discounts in price (e.g., Draper and Paudyal, 2006). In contrast, this study reveals that private founder price premiums and private founder return premiums can coexist. A potential reason for this is that the valuations and acquisition prices of private family or founder-controlled firms are underestimated relative to their fair value. This happens despite their having higher valuations and deal prices than private non-family firms. When founders sell their firms, the relatively higher prices they earn may not be commensurate with the firms’ fair value. Therefore, acquirers of such firms could gain more despite paying more. I find that private family firms receive a higher acquisition price than private nonfamily controlled firms. Furthermore, active founders prior to a merger increase the deal price. Acquirers of private family firms with founders who remain post-merger exhibit a higher deal price. I find that the acquirers of private family firms also garner higher post-merger abnormal returns than acquirers of private non-family targets. Acquirers of private family firms with active founders also garner higher abnormal returns, and the acquirers of private family firms with founders who remain exhibit the highest abnormal returns. These results suggest existence of a “founder premium” in the stock markets. Both “private family status” and “private founder status” have a significant positive impact on the acquisition price. Particularly, remaining founders have a robust significant positive impact on both acquisition price and acquirers’ subsequent stock returns. Hence, my findings suggest that private founders are valuable to acquirers. This paper may be the first to specifically study private family targets and private founders in mergers and acquisitions (M&A). The extant literature focuses on public family firms. I explore whether both acquisition price and return premiums can coexist and increase with the involvement of private founders, which incorporates additional aspects into the research on founders..

(17) 11. My research makes several contributions. First, I establish a link between private firm founders and acquirer returns. Second, I study private family firms, active private firm founders, and remaining private firm founders after mergers, and highlight the “founder effects” that exist beyond “private effects”, and may produce more synergies. Third, I identify significant acquisition premiums (both in deal prices and acquirer returns) associated with acquiring private family firms with remaining founders. 3.3. Essay 3: Relative performance, tenure and COO promotion in CEO selection. This study investigates new CEOs’ prior positions in the U.S. from 1992 to 2014, and focuses on three prior senior management positions: CEO, CFO, and COO. I find that internal COOs are the most likely to be promoted to the CEO position. Furthermore, firms that internally promote their COOs have higher industry-adjusted ROA operating performance and stock returns one year prior to the new CEO appointment than firms with externally recruited CEOs. All firms have negative industry-adjusted ROA over the prior five years, indicating that CEO turnover typically follows low firm performance relative to the industry. Firms that recruit external CEOs have negative industryadjusted cumulative stock returns over the past two years, whereas firms that promote internally CEO position have positive industry-adjusted cumulative stock returns over the past two years prior to the CEO change. I explore firm performance of the newly recruited external CEOs’ prior firms over the past one to five years. I find that the external CEOs’ prior firms performed better than their hiring firms prior to the CEO appointment. This suggests that outsiders are only being appointed when they are perceived as superior to insiders. I also find that the likelihood of internal COOs becoming the CEO is positively related to ROA and stock return, and negatively related to stock return volatility over a oneyear period prior to the new CEO appointment. The likelihood of external CEOs, COOs, and CFOs becoming the new CEO is negatively related to industry-adjusted ROA and stock returns of during the year prior to the new CEO appointment. This evidence further suggests that CEO selection between insiders and outsiders is driven by past relative performance. Moreover, I find that internal COOs are typically closer in rank to the CEO and have longer tenures than internal CFOs. Additionally, the relationship between rank, tenure, and COO promotion is positive and significant. This indicates that COOs winning out over CFOs in such promotions may be attributed to their rank and tenure, possibly reflecting accumulated managerial ability and work experience. My findings also reveal that the likelihood of COO promotion to CEO is negatively related to the “Ex-CEO resigned dummy”, and positively related to the “Ex-CEO retired dummy”, implying that performance-induced CEO turnover may affect the new CEO selection. I complement the extant literature by providing possibly the first results regarding COO promotions to CEO. Second, I bridge the gap in CEO turnover and internal promotion literature from the novel perspective of the new CEO’s prior management position. Third, I shed light on relative performance evaluation and peer firm effects on CEO selection. Moreover, I avoid the relative performance evaluation and peer performance summarization errors identified by Dikolli, Hofmann, and Pfeiffer (2013). Finally, I fill gaps in studies on executive rank, since few studies analyze the impact of rank on executive promotion..

(18) 12. REFERENCES Adams, Renee, Heitor Almeida, and Daniel Ferreira, 2009. Understanding the relationship between founder-CEOs and firm performance. .Journal of Empirical Finance, 16 (1). 136-150. Agrawal, Anup, Charles R. Knoeber, and Theofanis Tsoulouhas, 2006, Are outsiders handicapped in CEO successions? Journal of Corporate Finance 12, 619-644. Albuquerque, Ana, 2009, Peer firms in relative performance evaluation, Journal of Accounting and Economics 48, 69-89. Allgood, Sam, and Kathleen A. Farrell, 2000, The effect of CEO tenure on the relation between firm performance and turnover, Journal of Financial Research 23, 373390. Anderson, Ronald C., Augustine Duru, and David M. Reeb, 2009, Founders, heirs, and corporate opacity in the United States, Journal of Financial Economics 92, 205222. Anderson, Ronald C., David M. Reeb, 2003. Founding family ownership and firm performance: Evidence from the S&P 500. Journal of Finance, 58, 1301–1329. Bayar, Onur, and Thomas J. Chemmanur, 2012a, What drives the valuation premium in IPOs versus acquisitions? An empirical analysis, Journal of Corporate Finance 18, 451-475. Bayar, Onur, and Thomas J. Chemmanur, 2012b, IPOs versus acquisitions and the valuation premium puzzle: a theory of exit choice by entrepreneurs and venture capitalists, Journal of Financial and Quantitative Analysis 46, 1755-1793. Block, Joern H. 2012. R&D investments in family and founder firms: an agency perspective. Journal of Business Venturing 27, 248-265. Boot, Arnoud W., Radhakrishnan Gopalan, and Anjan V. Thakor, 2006, The entrepreneur's choice between private and public ownership, Journal of Finance 61, 803-836. Brau, James C., Bill Francis, and Ninon Kohers, 2003, The Choice of IPO versus Takeover: Empirical Evidence*, Journal of Business 76, 583-612. Brookman, Jeff, and Paul D. Thistle, 2009, CEO tenure, the risk of termination and firm value, Journal of Corporate Finance 15, 331-344. Burkart, M., Panunzi, F. and Shleifer, A., 2003. Family Firms. Journal of Finance, 58(5), 2167–2202..

(19) 13. Capron, Laurence, and JungǦChin Shen, 2007, Acquisitions of private vs. public firms: Private information, target selection, and acquirer returns, Strategic Management Journal 28, 891-911. Chan, William, 1996, External recruitment versus internal promotion, Journal of Labor Economics, 555-570. Chang, Saeyoung, 1998, Takeovers of privately held targets, methods of payment, and bidder returns, Journal of Finance 53, 773-784. Che, Limei and John Christian Langli. 2015. Governance Structure and Firm Performance in Private Family Firms. Journal of Business Finance & Accounting 42, 1216-1250. Chemmanur, Thomas J., Jie He, Shan He, and Debarshi K. Nandy, 2011, The exit choices of entrepreneurial firms, Working paper. Chrisman, James J.; Jess H. Chua; Franz W. Kellermanns and Erick P. C. Chang. 2007. Are Family Managers Agents Or Stewards? an Exploratory Study in Privately Held Family Firms. Journal of Business Research 60, 1030-1038. Claessens, S., Djankov, S., Fan, J.P.H., Lang, L.H.P., 2002. Disentangling the incentive and entrenchment effects of large shareholdings. Journal of Finance 57 (6), 2741–2771. Clemens, Adam, 2012, Position-specific promotion rates and the “fast track” effect, Research in Labor Economics 36, 77-107. Cooney, John W., Thomas Moeller, and Mike Stegemoller, 2009, The underpricing of private targets, Journal of Financial Economics 93, 51-66. Custódio, Cláudia, Miguel A. Ferreira, and Pedro Matos, 2013, Generalists versus specialists: Lifetime work experience and chief executive officer pay, Journal of Financial Economics 108, 471-492. Custódio, Cláudia, and Daniel Metzger, 2014, Financial expert CEOs: CEO‫׳‬s work experience and firm’s financial policies, Journal of Financial Economics 114, 125-154. Demsetz, Harold, and Kenneth Lehn, 1985. The structure of corporate ownership: Causes and consequences. Journal of Political Economy, 93, 1155-1177. Dikolli, Shane S., Christian Hofmann, and Thomas Pfeiffer, 2013, Relative performance evaluation and peer-performance summarization errors, Review of Accounting Studies 18, 34-65. Dikolli, Shane S., William J. Mayew, and Dhananjay Nanda, 2014, CEO tenure and the performance-turnover relation, Review of Accounting Studies 19, 281-327..

(20) 14. Draper, Paul, and Krishna Paudyal, 2006, Acquisitions: private versus public, European Financial Management 12, 57-80. Eddleston, K.A., Kellermanns, F.W., 2007. Destructive and productive family relationships: a stewardship theory perspective. Journal of Business Venturing 22 (4), 545–565 Eisfeldt, Andrea L., and Camelia M. Kuhnen, 2013, CEO turnover in a competitive assignment framework, Journal of Financial Economics 109, 351-372. Faccio, Mara, John J. McConnell, and David Stolin, 2006, Returns to acquirers of listed and unlisted targets, Journal of Financial and Quantitative Analysis 41, 197220. Fahlenbrach, Rüdiger, 2009. Founder-CEOs, investment decisions, and stock market performance. Journal of Financial and Quantitative, 44 (2), 439-466. Fama, Eugene F., and Michael C. Jensen, 1983. Separation of ownership and control. Journal of Law and Economics, 26, 301-325. Ferreira, Daniel, and Raaj K. Sah, 2012, Who gets to the top? Generalists versus specialists in managerial organizations, The Rand Journal of Economics 43, 577-601. Forbes, B., Piercy, J. 1991. Corporate Mobility and Paths to the Top. Quorum Books, Westport, CT. Fuller, Kathleen, Jeffry Netter, and Mike Stegemoller, 2002. What do returns to acquiring firms tell us? Evidence from firms that make many acquisitions. Journal of Finance. Vol. LVII (4) 1763-1793. Hertzel, Michael, and Richard L. Smith, 1993, Market discounts and shareholder gains for placing equity privately, Journal of Finance 48, 459-485. Huson, Mark R., Paul H. Malatesta, and Robert Parrino, 2004, Managerial succession and firm performance, Journal of Financial Economics 74, 237-275. Isakov, Dušan, and Jean-Philippe Weisskopf, 2014, Are founding families special blockholders? An investigation of controlling shareholder influence on firm performance, Journal of Banking & Finance 41, 1-16. Jensen, Michael C., and William H. Heckling, 1995, Specific and general knowledge, and organizational structure, Journal of Applied Corporate Finance 8, 4-18. Jensen, Michael C., and William H. Meckling, 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305-360..

(21) 15. Jenter, Dirk, and Fadi Kanaan, 2015, CEO turnover and relative performance evaluation, Journal of Finance, VOL. LXX, No. 5 Kaplan, Steven N., Mark M. Klebanov, and Morten Sorensen, 2012, Which CEO characteristics and abilities matter? Journal of Finance 67, 973-1007. Kaplan, Steven N., and Bernadette A. Minton, 2012, How has CEO turnover changed? International review of Finance 12, 57-87. Karaevli, Ayse, 2007, Performance consequences of new CEO ‘Outsiderness’: Moderating effects of preϋand postϋsuccession contexts, Strategic Management Journal 28, 681-706. Kuang, Yu F., Bo Qin, and Jacco L. Wielhouwer, 2014, CEO origin and accrual-based earnings management, Accounting Horizons 28, 605-626. Li, Feng and Suraj Srinivasan, 2011. Corporate governance when founders are directors. Journal of Financial Economics, 102 (2), 454-469. Mobbs, Shawn, and Charu G. Raheja, 2012, Internal managerial promotions: Insider incentives and CEO succession, Journal of Corporate Finance 18, 1337-1353. Morck, Randall, Andrei Shleifer, and Robert W. Vishny, 1988. Management ownership and market valuation: An empirical analysis. Journal of Financial Economics, 20, 293-315. Murphy, Kevin J., and Jan Zabojnik, 2004, CEO pay and appointments: A marketbased explanation for recent trends, American Economic Review, 192-196. Nicolaou, Nicos, Scott Shane, Lynn Cherkas, Janice Hunkin, and Tim Spector, 2008. Is the tendency to engage in entrepreneurship genetic? Management Science, 54 (1), 167-179. Officer, Micah S., 2007, The price of corporate liquidity: Acquisition discounts for unlisted targets, Journal of Financial Economics 83, 571-598. Officer, Micah S., Annette B. Poulsen, and Mike Stegemoller, 2009, Target-firm information asymmetry and acquirer returns*, Review of Finance 13, 467-493. Palia, Darius, Abraham Ravid, S., 2003. The role of founders in large companies: entrenchment or valuable human capital? Working Paper. Rutgers University Palomino, Frédéric, and Eloïc Peyrache, 2013, Internal versus external CEO choice and the structure of compensation contracts, Journal of Financial and Quantitative Analysis 48, 1301-1331..

(22) 16. Pan, Yihui, Tracy Y. Wang, and Michael S. Weisbach, 2015, Learning about CEO ability and stock return volatility, Review of Financial Studies , hhv014. Parrino, Robert, 1997, CEO turnover and outside succession a cross-sectional analysis, Journal of Financial Economics 46, 165-197. Poulsen, Annette B., and Mike Stegemoller, 2008, Moving from private to public ownership: selling out to public firms versus initial public offerings, Financial Management 37, 81-101. Puri, Manju. and David T. Robinson. 2007. Optimism and economic choice. Journal of Financial Economics, 86, 71.99. Puri, Manju. and David T. Robinson, 2013. The economic psychology of entrepreneurship and family business. Journal of Economics and Management Strategy, 22(2). 423-444. Prasad, Suraj, 2009, Task assignments and incentives: generalists versus specialists, The Rand Journal of Economics 40, 380-403. Schulze, William S.; Michael H. Lubatkin and Richard N. Dino. 2003. Toward a Theory of Agency and Altruism in Family Firms. Journal of Business Venturing 18, 473490. Schulze, William S.; Michael H. Lubatkin; Richard N. Dino and Ann K. Buchholtz. 2001. Agency Relationships in Family Firms: Theory and Evidence. Organization Science 12, 99-116. Villalonga, Belen. and Raphael Amit, 2006. How do family ownership, control and management affect firm value? Journal of Financial Economics, 80 (2), 385417. Villalonga, Belén; Raphael Amit; María-Andrea Trujillo and Alexander Guzmán. 2015. Governance of Family Firms. Annual Review of Financial Economics 7, 635654. Walsh, James P., 1988. Top management turnover following M&A. Strategic Management Journal, 9, 173-183. Wang, Cong, and Fei Xie, 2009, Corporate governance transfer and synergistic gains from mergers and acquisitions, Review of Financial Studies 22, 829-858. Xie, Yamin, 2015, Acquirer performance when founders remain in the firm, PacificBasin Finance Journal, 35, 273-297..

(23) 17. PART B:. The ESSAYS.

(24) 18. Essay 1: Acquirer performance when founders remain in the firm.

(25) Pacific-Basin Finance Journal 35 (2015) 273–297. Contents lists available at ScienceDirect. Pacific-Basin Finance Journal journal homepage: www.elsevier.com/locate/pacfin. Acquirer performance when founders remain in the firm☆ Yamin Xie Department of Finance, Hanken School of Economics, Helsinki, Finland. a r t i c l e. i n f o. Article history: Received 30 May 2014 Accepted 20 January 2015 Available online 28 January 2015 JEL Classification: G34 G14 G32 L26 Keywords: Merger performance Founding firm Remaining founders q theory Cumulative abnormal return. a b s t r a c t This study explores the impact of founders on acquirers' merger performance. The results show that the acquisition of founding firms has a relatively negative impact on acquirers' performance, whereas founders who remain in a firm post-merger have a relatively positive influence. Moreover, I find significant differences between the acquirers of firms where founders remain and the acquirers of firms where founders leave. The acquirers of firms in which founders remain exhibit a higher Tobin's q and greater cumulative abnormal returns. This phenomenon is more prominent when founders remain as daily executives than when founders remain as non-daily directors. Additionally, the length of time that the founders remain with the merged firm affects the findings. Finally, I document a robust positive relationship between the remaining founders and acquirers' value or stock returns, indicating the value of founders to acquirers. © 2015 Elsevier B.V. All rights reserved.. 1. Introduction For most successful entrepreneurial firms, a time comes for the founder to relinquish control (Burkart, Panunzi, and Shleifer, 2003). The targets of many mergers and acquisitions (M&As) are founder-controlled firms. Many founders become active sellers rather than appoint a successor or manager to conduct operations. Some founders who sell remain in the firm post-merger. This study examines acquirer performance in cases where the founder remains in the firm post-merger. Although various studies have addressed founding firms, few have focused on founders in merger cases. Particularly, there is scarce research concerning the founder's decision to remain in the firm and the value. ☆ I thank an anonymous referee, Balasingham Balachandran (the Guest Editor), Timo Korkeamäki, Benjamin Maury, and Anders Löflund for helpful comments. E-mail addresses: xie.yamin@hotmail.com, yamin.xie@hanken.fi.. http://dx.doi.org/10.1016/j.pacfin.2015.01.006 0927-538X/© 2015 Elsevier B.V. All rights reserved..

(26) 274. Y. Xie / Pacific-Basin Finance Journal 35 (2015) 273–297. of the founders to the acquirers. I investigate the value of founders to founding firms and, hence, to the acquirers of such firms. Prior literature has studied the founder role, revealing that founders add value through a combination of specialized knowledge, concentrated and long-term ownership, and non-pecuniary (e.g., reputational and emotional) ties to the firm (e.g., Demsetz and Lehn, 1985; James, 1999). Some studies have examined the role of founder–CEOs in firm performance and corporate decisions (e.g., Fahlenbrach, 2009; Adams, Almeida, and Ferreira, 2009). Villalonga and Amit (2006) demonstrate that, compared to the value of CEO founders, a founder's skills are almost as valuable when the individual is positioned as chairperson, with a hired CEO in place. Li and Srinivasan (2011) posit that financial and non-financial ties provide founders with the ability and incentive to conduct superior monitoring when they serve as directors. Additionally, Li and Srinivasan (2011) find that founder–director firms exhibit a valuation premium measured by Tobin's q. Regardless of whether their position is that of CEO, chairperson, or director, founders increase firm value. This evidence implies that founders' personal characteristics or congenital traits affect firm value. When founders sell but remain in the firm post-merger, they continue to play a role in the firm. Some founders act as daily executives in capacities such as CEO, CFO, COO, CTO, CSO,1 president, vice-president, and other “daily work positions,” and others assume “non-daily work positions” such as chairperson, vice-chairperson, director, secretary, or board member. Can founders remain in control of target firms and add value to acquirers post-merger? Do acquirers exhibit superior performance post-merger when founders remain? These questions motivate my study on the value of founders who remain in firms post-merger. This study investigates two factors. First, it examines the relationship between the firm founding status and acquirers' merger performance. Prior literature finds that a founding firm has a higher Tobin's q than a non-founding firm (e.g., McConaughy and Phillips, 1999; Morck, Schleifer, and Vishny, 1988; McConaughy, Matthews, and Fialko, 2001). I explore whether founding firms can transfer high q to acquirers. Second, this study examines the relationship between the remaining founders and acquirers' merger performance. One reason for acquirers to retain founders is to reduce agency cost. Founding firms typically have limited agency conflicts (e.g., Anderson, Mansi, and Reeb, 2003), and founders are likely to continue their principal responsibility because of an attachment to the firm. Additionally, remaining founders offer management and operational synergies to merged firms. Remaining founders become the “confidence symbol” that enhances synergies and reduces the otherwise high turnover rates in acquired management teams (Walsh, 1988). Finally, remaining founders can help form a creative environment and an effective corporate culture. Thus, I explore whether target founders bring value to acquirers. This study addresses two potentially endogenous factors. Founders may sell poor quality firms. The hidden risk represents potential financial constraints for acquirers when founding firms face insolvency or difficulty surviving. Purchased firms may exhibit poor performance, low potential, or a downward spiral. Information asymmetry increases the acquirer's likelihood of buying a poor quality firm. Therefore, one endogenous question is: Do founders sell poor quality firms? Another endogenous factor is that founders may remain in high performing firms. If founders lose hope in their founding firm, they are more likely to leave. If founders are confident in the prosperity of the founding firm, they are likely to remain and continue to participate. A second endogenous question is: Do founders remain in high performing firms? As insiders, founders may possess private information concerning the founding firm. Founders decide whether to leave or remain based on their information and expectations. This study employs instruments to address the two endogenous issues. This study focuses on a specific M&A target market. I investigate the founding firms that are acquired by strategic buyers and that are 100% owned by the acquirers post-merger. The targets and acquirers are public firms. I define a founding firm as one founded by individuals (one or more), being an entrepreneurial firm in its early stage. Active founders are defined as individuals with an active position in the management and board of their founding firm until the moment of merger. Remaining founders are defined as those remaining with a management and board position post-merger. The founder remaining period is defined as the period from merger completion to the time that the founders leave the merged firm. This study reveals various findings. First, I find that the acquisition of founding firms has a relatively negative impact on acquirers' Tobin's q, whereas remaining founders have a relatively positive impact on 1 CEO denotes Chief Executive Officer, CFO denotes Chief Financial Officer, COO denotes Chief Operating Officer, CTO denotes Chief Technology Officer, and CSO denotes Chief Scientific Officer..

(27) Y. Xie / Pacific-Basin Finance Journal 35 (2015) 273–297. 275. acquirers' Tobin's q. This evidence demonstrates the value of founders. “Founding discount” shows that the acquirers of founding firms do not achieve greater q growth than the acquirers of non-founding firms. The q before mergers of founding firms is higher than the q before mergers of non-founding firms, which indicates that founders do not intend to sell poor quality firms. It might be more difficult to transfer founding firm synergies to acquirers than non-founding firm synergies. However, I find the existence of a “founder premium,” showing that founding firm acquirers with remaining founders achieve greater q growth than the acquirers of founding firms where founders do not remain and the acquirers of non-founding firms. The q before founding firm mergers with remaining founders post-merger is lower than the q before the merger of founding firms without remaining founders. This shows that founders do not intend to remain in high performing firms. The results of the instrumental variable regression and Heckman self-selection models also show that self-selection is not the basis for the founder decision to remain in a firm. Second, the acquirers of founding firms with remaining founders being daily executives exhibit a higher Tobin's q than the acquirers of founding firms where founders remain as non-daily directors. This result indicates that the “founder premium” is greater according to the level of founder devotion to the firm. Moreover, the findings are also affected by the length of time that the founders remain post-merger. The founder remaining period has a negative effect on acquirers' Tobin's q growth, but a positive effect on acquirers' cumulative abnormal return. This result implies that the effects of remaining founders may not be long term. Third, my findings show situations that are consistent with the “high q–buy-low q” merger theory (i.e., high-q firms buy low-q firms), which posits that buyers acquire founding firms except where founders remain as daily executives. Moreover, founding firms show a higher Tobin's q before merger than non-founding firms. This finding is consistent with the q theory. Finally, and notably, the results for the acquirer's cumulative abnormal return (CAR) are consistent with the acquirer's Tobin's q. I find that founding firms have a negative impact on the acquirer's CAR, whereas remaining founders have a positive influence on the acquirer's CAR. Additionally, the acquirers of founding firms in which founders remain gain significantly higher CAR than the acquirers of founding firms from which founders leave and the acquirers of non-founding firms. Moreover, acquirers gain the greatest CAR when they purchase founding firms in which founders remain as daily executives (mean 0.4%), but lose CAR when they purchase non-founding firms and founding firms from which founders leave (mean −0.8% for founding firms and −1.9% for firms where founders leave). This study addresses gaps in three major research areas. First, I extend the literature on founding firms with respect to M&As beyond the prior literature that has focused mainly on founding acquirers by addressing founding targets. Second, I add to the research concerning founder value to acquirers and extend the prior literature beyond the focus on founder value to founding firms. Finally, I complement the research on general founding firms and founders and extend the research beyond founding family firms and other family firms. My study makes four significant contributions. First, I build a clear link between founding firms and acquirers' merger performance. Second, I provide a perspective for the study of niche target markets concerning the sale of founding firms with remaining founders. Third, I explore the effect of remaining founders on acquirers' firm value and stock returns. Finally, I document a robust positive relationship between remaining founders and acquirers' merger performance, which indicates the value of target founders to acquirers. All these factors have economic and practical implications for M&A participants, business practitioners, and academics. 2. Related literature review 2.1. Founding firms, founders, and Tobin's q Several studies investigate the links among founding firms, founders, and Tobin's q. Most studies demonstrate that founder-controlled founding firms have higher Tobin's q (e.g., Li and Srinivasan, 2011; Morck, Schleifer, and Vishny, 1988; Adams, Almeida, and Ferreira, 2009; Anderson and Reeb, 2003; Palia and Abraham Ravid, 2003, and Villalonga and Amit, 2006). Classic agency theory posits that managerial ownership by the founder or family affects firm value (e.g., Fama and Jensen, 1983; Jensen and Meckling, 1976; DeAngelo and DeAngelo, 1985). Some studies examine the effect of ownership change on firm value. Stulz (1988) proposes that values initially rise as ownership becomes more concentrated and then fall because of management insulation. Morck, Shleifer, and Vishny.

No results found