This study investigates whether a target firm's corporate social responsibility (CSR) performance creates value for shareholders. Our results indicate that target CSR performance that is stronger than that of the acquirer firm yields higher premiums for target shareholders. In addition, the positive valuation effect of CSR is more pronounced when well‐governed acquirers conduct the takeover. Our evidence is robust to several sensitivity tests. These results imply that favorable market reactions to the target's CSR are due to the market expectation that well‐governed acquirers reward the target's shareholders with a fair CSR value in merger and acquisition (M&A) transactions. Consistent with the stakeholder theory that maximizes stakeholder value, investing in CSR creates value in M&A transactions.

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