Employment Change after Takeovers: The Role of Executive Ownership
| Author | David Higgins,Azimjon Kuvandikov,Andrew Pendleton |
| DOI | http://doi.org/10.1111/bjir.12012 |
| Date | 01 June 2014 |
| Published date | 01 June 2014 |
Employment Change after Takeovers:
The Role of Executive Ownership
Azimjon Kuvandikov, Andrew Pendleton and
David Higgins
Abstract
The article examines the impact of executive ownership and other ownership
and governance factors on employment change after takeovers. Drawing on a
dataset of 235 takeovers, the results show that there is a reduction in employ-
ment in just over 50 per cent of the sample. Higher levels of executive share
ownership are associated with lower probabilities of employee layoffs post-
takeover, and there is a positive relationship between executive ownership and
employment growth. The effect of executive options on employment change is
generally insignificant, as are the effects of other features of ownership and
governance. The evidence suggests that executives with higher levels of owner-
ship tend to mount takeovers of better-performing firms and to implement
takeovers aimed at growth.
1. Introduction
Mergers and acquisitions (M&A) are controversial because of their perceived
adverse effects on employment. These transactions are often followed by
restructuring, divestments and plant shutdowns, leading to layoffs and reduc-
tions in employment (Conyon et al. 2001, 2002a; Lehto and Böckerman
2008). They can have catastrophic consequences for workers, especially
when large-scale reductions occur in localities where alternative employment
opportunities are limited. Equally, there is some evidence of employment
growth after takeovers, especially when divestments (job transfers) are taken
out of the equation (Denis 1994). A key question concerns the factors asso-
ciated with employment change after M&A. Why do some transactions result
in declines in employment while others are followed by employment growth?
Azimjon Kuvandikov is at the University of Essex. Andrew Pendleton and David Higgins are at
the University of York.
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British Journal of Industrial Relations doi: 10.1111/bjir.12012
52:2 June 2014 0007–1080 pp. 191–236
© 2013 John Wiley & Sons Ltd/London School of Economics. Published by John Wiley & Sons Ltd,
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
The role of executive ownership and other ownership and governance
factors in explaining these outcomes is tested and evaluated in this article.
Recent industrial relations literature has suggested that corporate gover-
nance and ownership can have a substantial impact on the labour effects of
M&A and their aftermath (Armour et al. 2003; Gospel and Pendleton 2003).
But as yet there has been little empirical scrutiny of this particular issue,
although there has been a long tradition of research into the employment
effects of M&A (Brown and Medoff 1988; Conyon et al. 2002a; Shleifer and
Summers 1988).
In the article we empirically examine the relationship between ownership
and employment change after M&A, focusing especially on the impact of
executive ownership. It is based on a study of 235 takeovers among British
listed companies taking place between 1990 and 2000, inclusive, supple-
mented by data drawn from a control sample of 470 non-merging firms,
matched by industry, size and pre-takeover performance (Barber and Lyon
1996; Loughran and Ritter 1997). The article examines the factors associated
with employment growth and decline within one and three years of the
transaction and with layoff announcements.
The results show that employment reductions are far from universal. By
the end of the first year after the transaction, there is an average reduction of
employment of 2.6 per cent per company, with a reduction occurring in 54
per cent of cases. Employment reductions are concentrated in merged com-
panies that divest some operations after the takeover: when companies
making divestments are excluded, there is average employment growth of 4
per cent after one year (cf. Denis 1994). Layoffs are announced in the first
year post-takeover in 43 per cent of cases (28 per cent when divestment cases
are excluded), but in 12 per cent of these layoffs, effects are counterbalanced
by employment growth.
Our main finding is that executive share ownership is a significant influence
on post-transaction employment change. Higher levels of executive owner-
ship are associated with lower probabilities of layoffs. There are positive and
sizeable relationships between executive ownership and employment change.
These results hold whether or not we include cases where divestments take
place. The effects of options and ownership by other bloc holders are far less
strong. Although the results are often in the direction predicted, the coeffi-
cients are insignificant in nearly all instances.
Because the effects of executive ownership are so pronounced, further
analysis in the article mainly concentrates on this form of ownership. We
examine whether the relationship between executive ownership and employ-
ment change is curvilinear, based on the findings in the literature that own-
ership has strong nonlinear effects on performance (Bos et al. 2012; Morck
et al. 1988; Short and Keasey 1999). We find little evidence to support this
perspective in the case of employment change: the relationship is broadly
linear throughout the distribution of executive ownership. We further con-
sider whether the effects of managerial ownership are moderated by the
character, context and objectives of the takeover. We find little evidence to
192 British Journal of Industrial Relations
© 2013 John Wiley & Sons Ltd/London School of Economics.
support this as most interaction terms are insignificant. The exceptions are
significant interactions with takeover premia, the relative size of target com-
panies and diversification takeovers. We attribute these findings to selection
effects.
A key issue concerns the reasons for the consistently positive relationship
between executive ownership and employment change. One possibility is
that increasing ownership insulates top managers from shareholders and
enables them to create ‘insider alliances’ with workers. While we cannot rule
out alliances of this sort, there is little evidence to suggest that entrenchment
is an important explanation for our findings. The signs on the coefficients
of the other ownership variables are typically the same as the executive
ownership coefficients. Another possibility is that executives with ownership
incentives mount takeovers that are more likely to lead to employment
growth. We find stronger evidence in support of this selection argument.
Executive owners mount takeovers of firms with better relative labour pro-
ductivity, and tend to mount takeovers aimed at growth rather than ratio-
nalization. We attribute this to loss aversion: executives with wealth tied up
in their employer will avoid mounting takeovers that may adversely affect
their wealth.
To the best of our knowledge, these results for ownership and governance
are novel: we are unaware of any previous studies on the effects of ownership
and options on employment in the UK after takeovers. They refine our
understanding of the employment effects of takeovers, and highlight factors
associated with job loss and growth. They counter the view that instruments
that are said to align managers with shareholder interests will typically have
negative impacts on labour. A possible implication of our results is that as
ownership by executives is increasingly promoted in the UK in place of other
instruments such as stock options, takeovers could come to have more benign
effects on labour.
In the next section we provide background material on the role of owner-
ship and governance in influencing employment change after takeovers. We
then outline the data sources and variables, and then present the results of the
multivariate analysis. In the final section, we consider the implications of the
findings and the limitations of our approach.
2. Background: theory and evidence
There is an extensive literature on the employment effects of takeovers in the
USA and the UK, reflecting the large relative size of the listed company
sector in these countries and an accompanying high level of M&A involving
large firms (Rossi and Volpin 2004). The evidence suggests that employment
reductions often follow M&A (Deakin and Slinger 1997; Lehto and Böcker-
man 2008), although it is not always clear whether these arise from job
transfers or job destruction. A wide variety of explanations for post-takeover
employee layoffs and employment reduction after takeovers can be found
Employment Change after Takeovers 193
© 2013 John Wiley & Sons Ltd/London School of Economics.
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