Evidence on the trade-off between corporate social responsibility and mergers and acquisitions investment

Abstract

In this article, we investigate whether there is a trade-off between corporate social responsibility (CSR) and mergers and acquisitions (M&A) investments. Consistent with conflict resolution view of stakeholder theory, our results document a negative relationship between CSR scores and M&A activity. We further show that the tendency of CSR firms’ low engagements in M&A investmen ts is valid only for firms with no slack. We also find that firms choosing to trade off pay a lower bid premium to targets to create value for acquiring shareholders. These findings are robust to several alternative proxies and endogeneity tests. JEL Classification: G32, G34

The effect of ESG on value creation from mergers and acquisitions. What changed during the COVID-19 pandemic?

“…Analysing 1,310 merger transactions between 2002 and 2012, Zhang et al (2020) observe positive abnormal returns for high-CSR acquirers upon the announcement of acquisitions, though the returns are negative when the acquisitions are hostile. Krishnamurti et al (2020) also find significant positive announcement period excess returns for CSR-oriented acquirers for a sample of 776 Australian M&As between 2000 and 2016. In addition, they suggest that socially responsible firms are more likely to acquire targets with CSR-orientation, offer lower bid premiums, use cash over stock payment and make single bids.…”

“…Considering the multidimensional nature of CSR, the literature provides several alternative metrics for its measurement. A common proxy measuring CSR performance is the ESG score, which is believed to address the high complexity of measuring corporate sustainability and for this reason, it is widely used in the CSR literature (Broadstock et al , 2020; Demers et al , 2020; Fatemi et al , 2017; Krishnamurti et al , 2020).…”

“…The results also show that firms that acquired SRI-aware targets managed to improve their social and environmental performance, suggesting the ability of acquirers to learn from the targets’ SRI activities and practices. Other studies investigate the effects of ESG corporate performance on various M&A outcomes such as acquisition premiums (Gomes and Marsat, 2018; Qiao and Wu, 2019), target selection and screening process (Gomes, 2019), target valuation (Chen and Gavious, 2015), deal-related uncertainty (Arouri et al , 2019), the level of investment in mergers (Krishnamurti et al , 2020), the potential for a firm to become either a target or an acquirer (Boone and Uysal, 2020) and the post-merger market valuation (Tampakoudis and Anagnostopoulou, 2020).…”

“…Therefore, the market for corporate control provides a suitable setting to investigate the value effects of CSR. Many studies examine the impact of CSR on shareholder value in the M&A context, providing mixed findings (Deng et al , 2013; Fatemi et al , 2017; Krishnamurti et al , 2020; Yen and André, 2019; Zhang et al , 2020).…”

“…Considering that limited attention has been paid to social and environmental dimensions of M&As (Aktas et al , 2011; Gomes and Marsat, 2018), our study contributes to the debate focusing on the impact of ESG performance on the market reaction upon merger announcements. What sets our study apart from related studies (Deng et al , 2013; Fatemi et al , 2017; Krishnamurti et al , 2020; Yen and André, 2019; Zhang et al , 2020), is that we examine the effect of ESG on excess returns around the pandemic crisis. Our research approach allows us to study the implications of ESG in the market for corporate control in the most recent period and helps us to examine the evolution of such implications over economic cycles.…”