Who Drives Corporate Restructuring? Co‐Existing Owners in French Firms

• DOI: http://doi.org/10.1111/corg.12108
• Author: Nikolaos Kavadis,Xavier Castañer
• Published date: 01 September 2015
• Date: 01 September 2015

Who Drives Corporate Restructuring? Co-Existing

Owners in French Firms

Nikolaos Kavadis*and Xavier Castañer

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: This study aims toexplain who drives corporate restructuring, after a period of important corporate

governance changes in France, and where the respective role of Anglo-American institutional investors and domestic family

owners have been the object of debate.

Research Findings/Insights: Using extensive longitudinaldata from French publicly-listedf‌irms during the 2000–2007 period,

we f‌ind that domestic familyownership is positively related to restructuring. This effectis magnif‌ied under conditions of high

Anglo-Americaninstitutional investor ownership andpoor f‌irm performance. We also f‌ind thatrestructuring improves subse-

quent f‌irm performance.

Theoretical/Academic Implications: We contribute to corporategovernance research on familyf‌irms with a contingent frame-

work about the relative inf‌luence of different types of owners with supposedly different value systems and preferences on

restructuring. Domestic family owners, even from a country where shareholder value maximization is not historically preem-

inent, promote restructuring. In contrast, the inf‌luence of Anglo-American institutional investors is indirect:the more they are

present in the f‌irm’s capital, the more French family owners will further support restructuring, as a means to preserve their

socio-emotionalwealth. Anglo-American institutional investorinf‌luence on French family owners is furtheraccentuated under

conditions of poor f‌irm performance.

Practitioner/Policy Implications: Practitioners and, in particular,(potential and current) owners can use our f‌indings to ref‌lect

on the implications for corporatedecisions of the relative presenceof different owners coming fromdifferent institutionalenvi-

ronmentsand thus with potentially differentobjectives. Our results may alsobe informative to policy makers to furtherenhance

effective regulation.

Keywords: CorporateGovernance, Corporate Restructuring, Family Ownership,Anglo-American Institutional Ownership

INTRODUCTION

For more than two decades, the development and globali-

zation of f‌inancial markets have coincided with increased

restructuringby large publicly listed corporations(e.g., Singh,

1993; Whittington, Pettigrew, Peck, Fenton, & Conyon, 1999).

Several researchers have attributed this activity to pressures

from globally operating investors, and in particular from

Anglo-American institutional investors (e.g., Goyer, 2003;

Morin, 2000; see also Desender, Aguilera, Lopez-Puertas

Lamy, & Crespi, 2015). According to prior research, those in-

vestors actively advocate for corporate restructuring, which

is thought to increase the f‌irm’s productivity and value cre a-

tion. In this context, owners from countries with different

value systems than the one in the Anglo-American institu-

tional context, as well as family owners, are thought to have

a rather defensive role and resist restructuring pressures,

because such activities are likely to be detrimental to their in-

terests (e.g., Gómez-Mejia, Cruz, Berrone, & de Castro, 2011).

In this study, we argue that corporate restructuring in a

given institutional (country) context is driven by the coexis-

tence and interaction of different types of owners, some of

which might be pro-shareholder value maximization (SVM)

such as Anglo-American institutional investors, and others

who come from countries with different value systems and

preferences, as well as family owners when they are present.

We draw on research on corporate governance that has

highlighted the differences across countries (Aguilera &

Jackson, 2010), and on behavioral research that has

underscored the importance of socio-emotional wealth in

family f‌irms (Gómez-Mejia, Takacs-Haynes, Nuñez-Nickel,

Jacobson, & Moyano-Fuentes, 2007; Gómez-Mejia et al.,

2011) and of reference or aspiration points in determining

what performance levels are deemed satisfactory (e.g.,

Argote & Greve, 2007; Cyert & March, 1963). We propose

that (1) Anglo-American institutional investors will promote

restructuring; (2) family owners from countries that are not

historically SVM-oriented such as France, either directly or

*Address for correspondence: Nikolaos Kavadis, Department of Business

Administration,Universidad CarlosIII de Madrid, C/ Madrid 126, 28903 Getafe,Spain.

Tel:+34 91 624 8711; E-mail:nkavadis@emp.uc3m.es

© 2015 JohnWiley & Sons Ltd

doi:10.1111/corg.12108

417

Corporate Governance: An International Review, 2015, 23(5):417–433

through a chief executive off‌icer (CEO) who is a member of

the owner’s family, will resist corporate restructuring; but

(3) the greater the presence of pro-SVM owners such as

Anglo-American institutional investors, the more likely

French family owners will be compelled to support

restructuring; and (4) the greater the presence of pro-SVM

owners such as Anglo-American institutional investors and

the more the f‌irm performs poorly relative to aspirations,

the more likely French family owners will be compelled to

acquiesce to restructuring.

Our study focuses on large, publicly listed French f‌irms in

the 2000–2007 period, a context where SVM has not been the

sole or overriding corporate objective. Our results show that,

contrary to our expectation, French family ownership leads

to more rather than less corporate restructuring. Further,

Anglo-American institutional investors have no signif‌icant di-

rect effecton restructuring. However,in support of our contin-

gent view, we f‌ind that high Anglo-American institutional

investorownership and low f‌irm performance further enhance

the positive effect of French family ownership on corporate

restructuring. In additional analyses, we also f‌ind that corpo-

rate restructuring improves subsequent f‌irm performance.

This study contributes to research on corporate ownership

and governance, in particular of publicly listed family f‌irms.

Prior research has discussed whether the inf‌lux of Anglo-

American institutional investors directly caused the increased

restructuring act ivity in French f‌irms in general (Goyer, 2003;

Morin, 2000). We build on and advance prior research, show-

ing the greater intricacy in the impact of Anglo-American

institutional investors and of domestic family owners in

French publiclylisted family f‌irms. Hence,we contribute to re-

search thathas elaborated on the differing motivesand behav-

iors of various types of owners (Aguilera & Jackson, 2003),

and that f‌irm-leveloutcomes are likely to resultfrom the inter-

action of different owners (Aguilera & Jackson, 2010; Goyer,

2007; Jackson, 2005; Jung, Aguilera, & Goyer, 2014). Indeed,

we show that the presence of one owner type (Anglo-American

institutional investors) inf‌luences the effect of another type

(French family owners), while adding a second layer to the

contingent view of ownership inf‌luences on restructuring by

incorporating the role of performance aspiration gap on

owners’behavior.

Second, we contribute to the family business literature

(Gómez-Mejia et al., 2007, 2011). We add the importance of

one type of non-family owners from an institutional context

with a different governance tradition (Anglo-American insti-

tutional investors) in inf‌luencingthe strategic behavior of fam-

ily owners and family CEOs in our focal context (France).

Moreover, next to previously s tudied strategic out comes in

the family f‌irms literature, such as R&D investments, diversi-

f‌ication, and acquisitions (Gómez-Mejia, Campbell, Martin,

Hoskisson, Makri, & Sirmon, 2013; Gómez-Mejia, Makri, &

Larraza-Kintana, 2010; Miller, Le Breton-Miller, & Lester,

2010), our study extends the investigation of the effects of

family owners and managers to other strategic outcomes,

i.e., corporate restructuring.

Third, we alsocontribute to the literatureon the adoption of

globally advocated (and institutionalized, mainly in the US)

corporate governance practices and strategies (e.g., Aguilera

& Cuervo-Cazura, 2004; Fiss & Zajac, 2004; Goyer, 2003;

Ramaswamy, Li, & Veliyath, 2002), in a much less studied

empirical context, as compared, for instance, with the US con-

text. France is a large and highly industrialized country like

the US, thoughit has a distinct corporate governance tradition

(e.g., Lubatkin, Lane, Collin, & Very, 2005). We demonstrate

that the adoptionand implementation of one of such practices

(corporaterestructuring) by f‌irms with a Frenchfamily owner,

i.e., not only concerned about SVM andfrom a country where

SVM has not been historically the overriding corporate goal,

relates to the extent Anglo-American institutional investors

coexist with this family owner, and also to the f‌irm’s

performance.

LITERATURE REVIEW

Corporate restructuring is a multifaceted concept; it can refer

to a broad range of transactions, such as divestments,acquisi-

tions, capital structure changes, and “going private,”among

others (Singh, 1993), implying rapid, signif‌icant, and often

radical changes (Bowman & Singh, 1989). A main objective

of corporate restructuring is SVM, through productivity en-

hancements and cost controls (Singh, 1993). A signif‌icant pro-

portion of f‌irms in the US experienced corporaterestructuring

in the 1980s and the early 1990s (Villalonga & McGahan,

2005). Johnson (1996) mentions, for instance, that in 1986

alone, US f‌irms carriedout 1,200 divestments equal to a value

of $59.9 billion, whereas during 1981–1989, 55,000 mergers

and acquisitions took place, equal to a value of almost $2 tril-

lion (see also Jensen,1993). Such corporate restructuring activ-

ity has had a profound effect on the US economy as a whole

(e.g., Lazonick & O’Sullivan, 2000).

Prior researchhas theorized and providedevidence on a va-

riety of factors that can trigger corporate restructuring. One

main reason is poorf‌irm performance. For instance, Hamilton

and Chow (1993) found that poor f‌irm performance leads to

the divestment of organizational units.

Other f‌irm-level factors that have been shown to yield cor-

porate restructuring are the f‌irm’sbusinessscope,f‌inancial

structure, and corporate governance. Specif‌ically, operating

in unrelated businesses has been observed to increase the

chances for corporate restructuring. For instance, Markides

(1992, 1995)found that f‌irms with greater businessdiversif‌ica-

tion levels than their industry counterparts have greater

chances to restructure their portfolio toward greater business

focus (see also Smart & Hitt, 1994). Further, research shows

that announcementsof the refocusing of overdiversif‌iedf‌irms

trigger positive market reactions (see, e.g., Markides, 1992,

1995). In regard to the f‌irm’sf‌inancial structure, the amount

of debt relative to equity may foster restructuring, especially

in the form of divestments, as means to increase f‌irm eff‌i-

ciency and lower debt levels (Seth & Easterwood, 1993).

Af‌irm’s governance is also among the factors impacting

chances of subsequent restructuring. In a sample of the 388

Fortune 500 f‌irms from the 1981 list that survived in 1987,

Bethel and Liebeskind (1993) foundthat ownership concentra-

tion leads to corporate restructuring, in terms of decrease in

the f‌irm’s sales and employees, and increase in divestments

(see also Gibbs, 1993) for a sample of large US corporations

during 1982–1987. This is consistent with agency theory re-

search which assumesthat diversif‌ication is value destroying,

and that better(per agency theory) governancewill prevent or

418 CORPORATE GOVERNANCE

© 2015 JohnWiley & Sons LtdVolume 23 Number 5 September 2015