Family's Promise: Evidence from Contingent Contract Fulfillment in M&As

Abstract

This paper examines the unique nature of ethical behaviors within family firms by investigating the fulfillment of contingent contracts in M&As. Drawing upon the socioemotional wealth theory, we find that reputational concern and long-term orientation lead family firms more likely to fulfill committed performance targets than nonfamily firms, and the effect is stronger in family firms with higher socioemotional endowments. Moreover, this positive role of the family in facilitating fulfillment is highlighted in weaker corporate governance and riskier transactions. Mechanism tests reveal that family acquirers achieve superior performance through spending more effort in the post-deal stage such as sending managers to target firms for deeper integration and closer monitoring, rather than pre-deal conservatism. Further analyses show that family firms’ outperformance cannot be explained by opportunistic earnings manipulations but by deal success, as indicated by family firms’ indifferences in the propensity to marginally exceed performance targets from nonfamily firms, and the lower likelihood to receive comment letters and record goodwill impairment. We present evidence on the differences in ethical behaviors between family and nonfamily firms from the perspective of performance fulfillment in M&A contracts, providing important insights on how to promote business ethics in the capital market.

Keywords: family firms, socioemotional wealth, performance commitment, mergers and acquisitions, informal institutions

JEL Classification: G32, G34, D86, L14