For love or money? Family versus financial blockholders in international acquisitions

• Published date: 01 March 2022
• Author: Victor Zitian Chen,Bersant Hobdari,Franz W. Kellermanns,Anne Sluhan
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/corg.12392

ORIGINAL ARTICLE

For love or money? Family versus financial blockholders in

international acquisitions

Victor Zitian Chen

1

| Bersant Hobdari

2

| Franz W. Kellermanns

3,4

| Anne Sluhan

5

1

Affiliate Faculty in Data Science and

Organizational Science, Belk College of

Business, University of North Carolina,

Charlotte, North Carolina, USA

2

Affiliate Faculty at the Centre for Corporate

Governance, Department of International

Economics, Government and Business,

Copenhagen Business School, Frederiksberg,

Denmark

3

Belk College of Business, University of North

Carolina, Charlotte, North Carolina, USA

4

Associated Faculty Member, WHU, Otto

Beisheim School of Management, Vallendar,

Germany

5

College of Business Administration, Texas

A&M University, College Station, Texas, USA

Correspondence

Bersant Hobdari, Department of International

Economics, Government and Business,

Copenhagen Business School, Porcelænshaven

24 2000, Frederiksberg, Denmark.

Email: beh.egb@cbs.dk

Abstract

Research Question/Issue: We study the relationship between family blockholding of

voting rights and the relative size of international acquisitions, and the moderating

effect of two types of financial blockholders (pressure-resistant and pressure-

sensitive blockholders).

Research Findings/Insights: Employing an international sample of 8,687 non-finan-

cial cross-border acquisitions conducted by 4,630 acquirer firms from 40 home mar-

kets to 66 host countries between 2004 and 2013, we find a U-shaped relationship

between family blockholding of voting rights and the relative size of international

acquisitions. Further, we find evidence that this relationship is moderated by the

presence and type of financial blockholders. While pressure-resistant financial

blockholders shift this relationship downwards (due to intensified conflicts),

pressure-sensitive financial blockholders shift it upwards.

Theoretical/Academic Implications: We contribute to the literature on family firm

governance and internationalization on several fronts. First, we revisit the predomi-

nant logic of linear effects of the family blockholding. We suggest the family

blockholding's effects are related to nonlinear risk preferences of family owners,

expressed through socioemotional wealth (SEW) slack. Second, we suggest that the

“dominant shareholder interest”assumption of family firms, usually based on the

controlling family's SEW should be interpreted contingent upon the interests of other

financial shareholders. Finally, using family-financial blockholder conflicts as the sce-

nario, we suggest that principal-principal conflicts depend on the composition of the

conflicting blockholders, specifically, upon the nature of their relations with the firm.

Practitioner/Policy Implications: This study offers insights to policymakers and those

interested in incentivizing family ownership that family owners' risk behaviors should

be understood and discussed in the context of different financial blockholders as a

reference group.

KEYWORDS

corporate governance, family firms, financial blockholders, international acquisitions, pressure-

resistant, pressure-sensitive, socioemotional wealth

Received: 3 December 2019 Revised: 22 May 2021 Accepted: 24 May 2021

DOI: 10.1111/corg.12392

140 © 2021 John Wiley & Sons Ltd Corp Govern Int Rev. 2022;30:140–160.wileyonlinelibrary.com/journal/corg

1|INTRODUCTION

Family firms, believed to be driven by an aversion to the loss of socio-

emotional wealth (SEW) (G

omez-Mejía et al., 2007, 2011), tend to

forego risky opportunities to maintain family control. Accordingly,

when it comes to risk-taking behaviors such as foreign acquisitions, the

literature suggests that family firms tend to be more conservative than

non-family firms. For instance, because foreign acquisitions often

require raising capital or debt as well as new human capital such as pro-

fessional managers, which would threaten the family control, family

firms would prefer domestic acquisitions or acquisitions into culturally

close host countries (Banalieva & Eddleston, 2011; G

omez-Mejía

et al., 2010). Focusing on firm-specific advantages, other scholars sug-

gest that family firms should confer unique competitive advantages in

risk-taking activities, such as “long-term orientation, flexibility, speedy

decision-making, and family culture as a source of pride and commit-

ment”(Fern

andez & Nieto, 2006, p. 242). Empirically, for instance,

focusing on reduced agency costs, Zahra (2005) finds that family

blockholding in US firms is positively related to a firm's corporate ven-

turing orientations, such as entering foreign markets. Yet, other studies

suggest that the effects of family blockholding on a firm's corporate

venturing orientation, such as entering foreign markets, are positive

(e.g., Zahra, 2003, 2005) or complex (e.g., Fang et al., 2018).

Recent developments view many strategic decisions as mixed

gambles (Alessandri et al., 2018; Martin et al., 2013), simultaneously

involving the potential for both gains and losses. The mixed gamble

perspective is rooted in the behavioral agency model (BAM), which

emphasizes the change in risk preferences with framing problems and

the salience of reference points (Wiseman & G

omez-Mejía, 1998).

Applying the mixed gamble perspective to family firm internationaliza-

tion, Alessandri et al. (2018) find that, in general, family firms exhibit

lower internationalization than non-family firms, lower extent and

breadth of internationalization, and greater home region orientation.

Further, they find that internationalization strategies of family firms

differ among family firm types and the families' involvement in the

business.

We argue that these studies and the associated conclusions over-

look an essential dimension of family firm governance. Namely,

whether and how the contesting (or aligned) financial blockholders,

when they coexist with a family owner in a firm, would affect a

family-owned firm's willingness to use its advantages in risk-taking

behaviors. Conservative risk-taking behaviors of family firms, driven

by loss aversion of SEW, may be less necessary if a firm is already pre-

dominantly controlled by its family owner who is uncontested by the

other financial blockholders and thus less worried about the dilution

of control in risk-taking activities (Caprio et al., 2011). In developing

our arguments, we draw upon the mixed gamble and the willingness-

ability perspectives to examine family firm risk-taking behavior in the

context of cross-border acquisitions in the presence of financial

blockholders (Chrisman et al., 2015; De Massis et al., 2014). The

willingness-ability perspective requires that families simultaneously

possess the ability to act in their interests through involvement in the

firm's ownership and be willing to pursue family-specific ends.

We focus on cross-border acquisitions as the context for studying

risk-taking behavior. The cross-border acquisition is a risk-heavy

mode of firm expansion strategy (Seth et al., 2002), which typically

requires significant initial capital and implies augmented risks due to

international complexity and uncertainty across financial and legal sys-

tems, political environments, and cultures (Conn et al., 2005; Moeller &

Schlingemann, 2005). Consequently, international acquisitions

increase the degree of uncertainty about a firm's future returns and

other strategic benefits (Matta & Beamish, 2008). This, in turn, could

trigger conflicting perspectives among blockholders before the acqui-

sition decision, thus making it an ideal context in which to study

potential family-financial blockholder conflicts. The great resource

commitment of cross-border acquisitions can, in fact, often require

external financing and may lead to dilution of control of family owners

to other owners (e.g., G

omez-Mejía et al., 2010). As such, maintaining

control after an acquisition is more likely for firms with high initial

family control (well over 50%) than for those with low initial family

control (at 50% or lower). Further, we focus on acquisition size, which

can affect overall firm profitability (Chen et al., 2019) and impact the

risk profile and overall uncertainty to which the company is exposed

(Kumar et al., 2015). For instance, acquisition size may shift SEW-

related reference points (e.g., G

omez-Mejía et al., 2011) and the firm's

overall capabilities and knowledge base (Fang et al., 2018).

We suggest a U-shaped relationship between the voting rights of

family blockholders and the relative scale of foreign acquisitions. Spe-

cifically, we first argue that the risk-taking propensity of family

owners is driven by the tradeoff of SEW loss and financial gains from

an acquisition. This tradeoff, which is not universal, depends on the

size of the family's ownership share, leading family firms to display

conservative behavior at low to moderate ownership levels and more

risk-taking behavior at high ownership levels. The higher appetite for

risk at higher ownership levels is grounded in SEW slack, which we

define as ownership levels exceeding the controlling levels of the firm

(i.e., 50%), thus providing owners the ability to maintain control and

pursue SEW-related risk-taking activities.

We further suggest that the presence of financial blockholders

moderates the relationship between the voting rights of family

blockholders and the relative scale of foreign acquisitions. Evidence

exists that conflicts between large family blockholders and financial

institutional investors are likely to be salient (Maury & Pajuste, 2005;

Morck et al., 2005; Shleifer & Vishny, 1997). This is so because family

and financial blockholder groups may vie for control over manage-

ment to serve their preferences for risk and return. The latter can

encourage financial value-enhancing risk-taking projects and may con-

sider a family's SEW to conflict with their own investment preference

for financial returns (Choi et al., 2007; Hautz et al., 2013). A high level

of conflict underlying a relatively balanced voting position between

the competing blockholder groups may induce skepticism about

whom the management represents, leading to distrust and less likeli-

hood of consensus for approving an acquisition. Such conflicts also

depend on the type of financial blockholders. We differentiate finan-

cial blockholders from one another based on the degree of normal

business relations with the firm (Brickley et al., 1988; Brossard

CHEN ET AL.141