Takeovers and Target Firms’ Cash Holdings: Moderating Effects of Family Ownership and Takeover Regulation

Abstract

This study investigates the impact of cash holding of target firms on acquisition propensity. We investigate the moderating role of family ownership and takeover regulations on the association between takeovers and cash holding of the target firms by employing the logit regression model. Using data of Indian listed firms for 2003–2019, we observe that the cash holdings of the target firms have a positive and significant effect on their likelihood of acquisition. However, cash-rich-family firms have a negative but insignificant effect on the likelihood of acquisition, implying that the entrenchment effect due to family ownership dominates the liquidity effect of cash holding. When the family has more than 51% ownership in the firms, the ownership effect fully outweighs the cash effect. Further, using a regulatory intervention that impacts the ownership structure of the firms as an exogenous shock, the study shows that regulatory framework changes further exacerbate the entrenchment effect on the likelihood of takeovers, which does not allow for an active takeover market. Our results are robust to the alternative definitions of family firms and the takeover objectives. This study provides insight to the policymakers regarding the response of family firms to changes in regulation and also contributes to the literature on acquisition in countries with concentrated ownership structures.