Mergers by family firms and managerial delegation: a Cournot model and empirical evidence from Spain

Purpose - The purpose of this paper is to analyse a key research hypothesis: Do firms ruled by managers have a greater rationale to implement a mergers and acquisitions (M&A) than (family) firms managed by their owners? Design/methodology/approach - This paper uses an organizational-delegation-quantity oligopoly game to examine the profitability of M&As for firms that strategically delegate production decisions to managers versus family firms with no strategic delegation. This paper delimits the condition for delegation as aimed at increasing merger profitability: non-family CEOs will implement mergers more frequently than family CEOs and more so for inefficient firms because these require fewer synergies. The paper tests the main propositions with data on all M&As by small and medium firms in Spain in 2017 and 2018. Findings - The greater the average operating margin of a firm, the more likely a merger, which is also more likely between non-family firms. The evidence of higher ex post synergies by firms is not statistically significant due to large variability, suggesting that some family firms did not obtain the expected ex ante synergies. The lesson is that family firms competing in an environment of high marginal costs (e.g. industries in the early stage of the life cycle) seeking to grow through inorganic means such as M&As have an incentive to professionalize management. Research limitations/implications - This paper models competition in a Cournot fashion, representative of industries where firms compete in terms of sales growth and increased market share. Other results might hold in industries where firms are oriented to price competition or to service differentiation. The empirical research uses proxies for key variables such as the form of firm governance and unit costs, while hypotheses on ex ante synergies driving merger decisions had to be tested through ex post synergies. Originality/value - M&As by small firms and family firms remain largely unexplored in the literature. This paper contributes with both a theoretical model and empirical research that highlight the implications of strategic delegation contracts for M&A deals.