How do investors react to ESG-oriented M&As?

Abstract

In this paper, we examine the relationship between Corporate Social Responsibility (CSR), measured by ESG scores, and the market reaction to M&A announcements. The sample consists of 924 U.S. transactions between 2003 and 2021 that cover non-financial firms. The cross-sectional multivariate regression analysis shows a negative and significant relationship between market investors’ reaction and the target and/or acquirer ESG performance, indicating that the higher the ESG performance, the lower the market investors’ reaction to M&A announcements. The results also show that socially responsible acquiring firms pay a lower M&A bid premium and if the target is also a socially responsible firm, the M&A bid premium is lower as well. These results are important as they enable firms and markets to make better informed, more profitable, and most importantly, more sustainable decisions when evaluating M&A. Our results show that investors and the market do reward socially responsible firms in terms of reducing wealth loss and M&A bid premiums. The evidence indicates that the acquirer’s CSR is an important determinant of the way market participants react to M&A announcements.