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ESG - does it Pay in M&A? : investigating the ESG premium in mergers and acquisitions

Ung, Thuan Alexander; Urfe, Mads Nymoen
Master thesis
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URI
https://hdl.handle.net/11250/2766341
Date
2021
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  • Master Thesis [4657]
Abstract
Using a sample of 762 international M&As, we find a positive effect of ESG performance

on deal premia. We find that resource use, human rights, and management are the most

important categories of ESG. These aspects might be more quantifiable and relevant,

making them easier to value in a transaction and more attractive to the acquirer. Targets

receive higher premiums from raising their resource use score by one standard deviation,

compared to raising the total ESG score by one standard deviation, suggesting that targets

are better off focusing on this category for raising premiums.

Furthermore, we find that the effect of ESG performance on deal premiums diminishes

when the target is in the upper tercile of analyst following and in deals with share payments.

This finding supports extant research in that ESG reduces information asymmetries and

facilitates risk mitigation. Since we find a positive relationship between premia and ESG

scores, we argue that ESG initiatives are valuable. ESG affects synergies, information

asymmetries, and risk mitigation, supporting the stakeholder view of ESG in that ESG is

valuable. Our results are largely robust to correcting for potential endogeneity issues and

other robustness tests.

We also find that targets and acquirers improve their score by about five and seven

points, respectively, when merging with a higher-scored firm. Such a substantial score

improvement suggests that the transfer of ESG-related capabilities such as knowledge,

culture, reputation, and relationships with stakeholders is possible, as previous literature

suggests. This finding leads us to argue that merging to attain better ESG performance

might potentially be a contributing motive for M&A itself.

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