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

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.