Target’s Corporate Social Responsibility, M&A uncertainty and long-term operating performance

Abstract

Following the work of Arouri et al. (2019), we contribute to the corporate social responsibility (CSR) literature by investigating whether the CSR of target companies impacts mergers and acquisitions (M&A) completion uncertainty. Among other variables, such as, for example, the use of cash offers, the relative size of the target and the bid premium, the information asymmetry plays a central role on the takeover success. The higher is the asymmetry, the more difficult is the valuation process, the more likely is the deal to fail. In this paper we examine whether increased transparency induced by environmental, social, and governance (ESG) practices of the target is associated with a higher probability of deal completion. Our dependent variable is the arbitrage spread defined as the target share price paid by the acquirer minus the target stock price one day after the announcement date, all divided by the latter. The arbitrage spread is commonly used in the literature as a proxy for the completion uncertainty. A high spread reflects a high uncertainty about the probability of completion of a deal, and vice versa. Our main independent variables are the ESG performances of the target. More specifically, we perform two separated analysis. First, we assess whether the ESG performance ratings availability (ESG coverage) can affect the arbitrage spread. Subsequently, we investigate the effect on the same dependent variable of high ESG performance and low ESG performance separately. To investigate the relation between target's CSR and arbitrage spread and make sure our ESG measure does not proxy for other known factors that influence arbitrage spread we include several firm and deal-related control variables in our regressions, including also the acquirer ESG coverage and high and low ESG performances. We perform this analysis on a US based company sample of 836 M&A operations spanning the 1992-2014 period, using the ESG performance ratings given by Kinder, Lydenberg, and Domini (KLD). Furthermore, we use the same dataset for assessing whether the target ESG performance affect the long-term operating performance of the acquirer. For this test the dependent variables are the acquirer return on asset on years one, two and three after the deal announcement, while the main independent variables are the same of the previous analysis (i.e. target ESG coverage, high ESG performance and low ESG performance). The dataset is compounded of only successful deals in the US market. Future studies could analyse these relationships with a broader dataset which includes international M&A deals and that takes in consideration the unsuccessful takeover attempts.