Title page for ETD etd-04142008-172429

Type of Document Dissertation
Author Singal, Manisha
Author's Email Address msingal@vt.edu
URN etd-04142008-172429
Title Corporate Governance and Strategic Behavior: A Study of Acquisitions and CEO Compensation Practices of Publicly-Owned and Family-Controlled Firms in S&P 500
Degree PhD
Department Management
Advisory Committee
Advisor Name Title
Gnyawali, Devi R. Committee Co-Chair
Wokutch, Richard E. Committee Co-Chair
Arthur, Jeffrey B. Committee Member
Lang, James R. Committee Member
  • Mergers and Acquisitions
  • CEO Compensation
  • pay-for-performance sensitivity
  • Agency costs
  • Family-Controlled firms
  • Governance
  • Strategic Behavior
  • CEO stock ownership
  • Indirect Compensation
  • Interest Alignment
Date of Defense 2008-04-08
Availability unrestricted
Recent research has suggested that interest alignment, i.e., the degree to which members of an organization are motivated to behave in line with organizational goals, is a source of competitive advantage that can generate rents for the firm (Gottschlag and Zollo, 2007). Drawing on agency theory, this dissertation tests whether the interest alignment premise manifests itself differently in the strategic behavior of family-controlled firms when compared to their nonfamily peers. In particular, for firms in the S&P 500, I evaluate the results of two important strategic policies; mergers and acquisitions, as well as CEO compensation practices.

In studying acquisitions made by family and nonfamily firms in the S&P 500 index from 1992-2006, I find that family firms are more careful when embarking on actions leading to mergers than non-family firms, as evidenced by their selection of smaller targets and targets who are in related businesses. I also find that there is a preponderance of cash purchases by family firms that does not vary with market movements and that completion times for merger transactions are shorter than for non family firms. The care and concern with which family-controlled firms choose their “mates” translates into higher stock returns when compared with non-family firms. Overall, I believe that family-controlled firms derive value from their merger and acquisition strategy.

With regard to CEO compensation practices, I find that family firms provide strong incentives to the CEO for superior performance but pay significantly lower than nonfamily firms in terms of both salary and stock-based pay. The pay-for-performance sensitivity between annual stock returns and total compensation is significantly greater for family firms in general, and for family CEOs when compared with compensation of CEOs in nonfamily firms. The pay-for-performance sensitivity is in turn positively related to firm performance, suggesting that firms with greater pay-for-performance sensitivity (family controlled firms) also perform better.

The analyses in my thesis thus illustrate that family-controlled firms and non-family firms in the S&P 500 differ in their strategic decision-making. It would be fair to say that family firms have longer investment horizons and give deliberate thought to expending resources whether for acquisitions or for CEO pay, and may suffer lower agency costs than nonfamily firms due to family governance (and public monitoring) which may lead to their relative superior performance. This dissertation finds that each acquisition made by a family controlled firm generates an extra return of 0.50% when compared with a nonfamily firm, and family controlled firms earn 0.50% every year directly attributable to pay-for-performance sensitivity.

The study thus underlines and reiterates the importance of instilling the long-term view in the management of all firms, lowering agency costs, and aligning the interests of managers with those of stockholders for superior financial performance

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