Corporate Social Responsibility in Mergers &
Acquisitions
Universiteit van Amsterdam BSc Economics and Business Economics Bachelor Thesis: Finance and Organization
Supervisor: Mario Bersem
Valéry de la Haije (11297638)
Number of words: 8354
Amsterdam, 30 juni 2020
Statement of originality
This document is written by Student Valéry De la Haije who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Abstract
This research examines if short-term value is created for shareholders of the acquiring and target firm by the level of corporate social responsibility, measured by the ESG performance, of firms engaging in mergers and acquisitions.
The sample contains 218 merger and acquisition deals in the United States in a time period from 2006 until 2016. The abnormal returns for shareholders are calculated in a seven-day period around the announcement data and the ESG score is obtained from the MSCI ESG KLD STATS database. Two hypotheses are tested, namely: the stakeholder maximization view and the learning theory. In the stakeholder maximization theory, the total wealth of shareholders increases, as firms invest more in ESG activities. Operations of firms have more support if they are more in line with the stakeholders interests. The learning theory states that the willingness to learn from the
experiences and practices of the acquirer to deal with environmental and social risk is value creating for target shareholders.
To test the hypotheses, univariate and multivariate analyses are done. Moreover, two
alternative analyses on the credit crisis and the recent years are done. The results in this research do not support the stakeholder maximization view and partially support the learning theory.
Table of Contents
1. Introduction………... 5
2. Literature review & hypotheses……… 9
3. Method……… 13 3.1 Event study……….. 13 3.2 Sample………. 14 3.3 Regressions……….. 17 4. Results……….. 18 4.1 Descriptive statistics……… 18 4.2 Univariate analyses……….. 25 4.3 Multivariate analyses……… 28 4.3.1 Correlation……….. 28 4.3.2 Multiple regressions……….. 29 4.3.3 Alternative analyses………... 32 5. Discussion………. 39 5.1 Conclusions………39
5.2 Limitations and future research………..39
6. References………. 41
Introduction
Throughout the last 30 years, companies started to measure and report data on environmental, social and governance performances, referred to as, ESG data. In 2016, around 9.000 companies have released ESG data and have emphasized the importance of sustainability. Whereas in the beginning of 1990, only 20 companies had released data regarding their ESG performances (Amel-Zadeh & Serafeim, 2018)
The ESG performance measures to what extent a corporation is socially responsible. On the exact definition of corporate social responsibility (CSR) is still an ongoing debate since this has numerous meanings, applications and implications (Crane, Matten & Spence, 2013). Dahlsrud’s (2008) state that to understand the definition of CSR, five dimensions should be included:
stakeholder, social, economic, voluntariness and environmental. Their findings show that a definition of CSR in the existing literature include all the dimensions with a 50% probability and at least three dimensions with a 97% probability. These results show that the definitions used in the existing literature are similar and that using the different definitions in the existing literature would not affect the validity of this research. This research uses ESG data to ensure that this research is able to build upon and contribute to the existing literature on CSR.
The MSCI ESG KLD STATS database rates the ESG performance of firms based on seven qualitative issue areas: environment, social, socially responsible investment, corporate governance, employee relations, community, product, diversity, human rights and safety. (KLD, 2010) The measured ESG performance contains the five dimensions mentioned by Dahsrud’s (2008), which make it reliable to refer in the remainder of this research to ESG performance instead of CSR performance used in the existing literature.
Previous studies have linked the ESG performance to effects on economic level, however the effects of this are debatable. Bechetti, Ciciretti and Hasan (2009) findings show that events related to social responsibility have risen impact throughout the last years. When a firm exits a social index, the Domini index, negative abnormal returns around the exit-date are realized. Bechetti, Giacomo and Pinnachio (2005) found that the total sales per employee are higher if a firm is included in the Domini index. However, the higher ESG performance of a firm leads to lower return on equity (ROE), investment returns and return on capital. Grewal, Riedl and Serafeim (2017) state that higher ESG performance leads to higher net benefits around the event date of a disclosure of new
The choice to invest by firms in ESG activities is driven by the two factors. First of all, shareholders can actively exert pressure on the firm. In the second place, investing in ESG activities is a strategic move of the firm where they take the growing importance of the future into account (Deng, Kang & Low, 2013). In the United States, ESG performance in the operations of firms is becoming more important and there is more social awareness regarding Socially Responsible
Investments, or SRI. SRI funds take corporate governance, environment protection and human rights issues into consideration. Of the total assets under management, in the United States, 10 percent of the assets are socially screened (Renneboog, Ter Horst & Zhang, 2007). According to a survey of PwC, in which they investigate how 162 private equity firms approach their responsible investments, 91% have adopted or are adopting policies on responsible investments (PwC, 2019). Previous studies have examined if ESG performance is profitable and interesting for investors, yet the outcomes of the studies are doubtful. If the Corporate social performance (CSP) of a firm is higher, investment in a particular stock, by an amount of institutions increases (Waddock & Graves, 1997). However, shareholders values are significantly harmed by expenditures on ESG activities (Brammer, Brooks & Pavelin, 2005).
The previous mentioned studies related to the ESG performance and financial performance of firms indicate that there exists a tradeoff between the value creation of stakeholders and the value creation of shareholders. To create a clearer perspective about the tradeoff, especially the two
opposite sides, the research of Freeman and McVea (2001) is used to emphasize the relation between stakeholder management and business strategies.
The stakeholder approach is seen as a reaction to the changing unanticipated environmental levels and the concerns of managers regarding the changes. To reach success in the long term, objectives set by managers have to be supported by stakeholders. Business strategies can only be developed if the relationships with all the stakeholders are explored by managers. The findings of Freeman and McVea (2010) indicate that the focus on corporate activity shifts to interests
maximization from shareholders to stakeholders when ESG performance has growing importance in the business strategy. However, they claim that companies are financially hurt if the performance on social level is low.
From the perspective of the shareholders, current share prices in the short-term are the most important components within the management of the firm. This approach maintains consistent credibility, even if it has a negative effect in the long run on other stakeholders, in this case non-shareholders. Millon, Vasudev and Watson (2012)constructed the enlightened shareholder value (ESV) view in which all the relevant interest of stakeholders is taken into account to increase the wealth of shareholders by seeking for profits and sustainable growths in the long run. This angle is
not supported, because if all stakeholders need to be satisfied, the public should be fully informed about all the activities of the firm. Nevertheless, problems regarding environmental and human rights concerns are not optimally exposed to adjust the view of management and it is not clear that all of these problems influence corporate decision-making. The reputation of the firm to deal with problems regarding ESG performance is important, however concerns on cost-benefit remain the main driver of management within a firm such that firms are not motivated by the ESG course (Millon et al., 2012).
The results differ between ESG performance and performance for investors, and between ESG performance and firm performance in previous research. This research examines why there are still decisions made by managers to invest in ESG performance and if this is value creating or destroying for shareholders of both the acquiring and target firm. Additionally, this research studies the explanations for the short-term value creation or destroying for shareholders. The tradeoff between stakeholders and shareholders will be taken into account to identify what the main drivers for this short-term value creating or destroying are. This will be conducted by looking at multiple mergers and acquisitions, within the United States, for a ten-year time period; from 2006 until 2016. Based upon the existing literature about ESG performance and financial performance, the following research question can be formed:
Does the level of corporate social responsibility of firms engaging in mergers and
acquisitions, as measured by the ESG performance, create short-term shareholder value for the shareholders of both the acquiring and target firm?
The reason that an external governance mechanism, such as mergers and acquisitions is used in this research, is because mergers and acquisitions are one of the biggest investment possibilities firms can have, as a result of restructurings and corporate control transactions, an impact on customers, employees, managers, suppliers, shareholders and externals (Deng et al., 2013; Aktas et al., 2010). Production workers, staff or middle managers are influenced by the expansion or contraction of resources within the firm as a result of major organizational changes (Jensen, 1987).
According to Andrade and Stafford (2004), assets and stocks of the acquiring firm are increasing as soon as a merger or acquisition takes place. This is the first-order effect of this type of investment. Motivations for mergers decisions are based on factors regarding expansion and growth opportunities, where a relation exists between internal investments and mergers decisions. Since firms focus on future growth, they may take decisions that are in line with their ESG goals. Additionally, in the completion process of mergers and acquisitions, firms are facing some
challenges and different stakeholders have to support the actions taken by managers within this process. The outcome of mergers and acquisitions and the integration process after completion, are significantly influenced by the stakeholders, which makes it more essential to link mergers and acquisitions to ESG performance (Deng et al., 2013).
Previous studies also show the reverse causality problem that has occurred between firm value and ESG performance. Luo and Flammer (2015) eventually excluded larger firms, since this would give less exogenous results. Waddock and Graves (1997) conclude in their research that higher social performance is positively affected by higher ESG performance. However, firms with a higher value seem to have higher corporate social performance. To alleviate the reversed causality problems, this research uses mergers and acquisitions as an unanticipated event.
Prior research has used mergers and acquisitions frameworks to link ESG performance to firm performance. While Waddock and Graves (1997) have used mergers and acquisitions to link ESG performance to financial performance, Hawn (2013) used mergers and acquisitions in his research to determine that higher ESG performance leads to faster completion of deals abroad made by firms in emerging markets.
The existing literature on value creation for shareholders and ESG performance of firms engaging in mergers and acquisitions is limited (Deng et al., 2013; Aktas, de Bodt & Cousin, 2010; Fairhust & Greene, 2020). The paper by Fairhust and Greene (2020) examines if the ESG
performance of the target is value creating for shareholders of the target firm. They find that
shareholders generally benefit from higher ESG performance of the target. However, the negotiating position for targets who invest excessively in ESG activities worsen. The chance that these targets will become takeover targets increases. Since this research focuses on the short-term shareholder value creation by the ESG performance of the acquirer, only the method of the paper by Fairhust and Greene (2020) will be useful for this research.
Derived from the perspective of Deng et al. (2013) and Aktas et al. (2010), the assumption in this research is made that there exists a relation between the abnormal returns for shareholders around the announcement date and ESG performance of the firm. This assumption is build upon the stakeholder maximization view by Deng et al. (2013) and the learning theory by Aktas et al. (2010). In comparison with both researches, this research contributes to the existing literature, by looking at a more recent time frame and looking at the value creation for shareholders of the target as well.
In the remainder of this research, two hypotheses on the stakeholder maximization view and learning theory will be formed. The hypotheses will be tested by univariate and multivariate
Literature review & hypotheses
The definition of mergers and acquisitions in this research is subtracted from the neoclassical
economic theory in which the specific assets of a firm or the entire firm is purchased by another firm. Synergy is created by combining existing assets, which leads to higher productivity (Ahern &
Weston 2007). In this research is referred to takeovers as the definition of mergers and acquisitions since only mergers where the acquirer obtains a minimum of 50% of the target are included.
The question why managers decide to undertake mergers and acquisition has been examined by Andrade, Mitchell and Stafford (2001). They conclude that mergers and acquisitions are the main strategic tool for the majority of firms. This strategic tool is used with the eye on future growth and success. Economies of scale, synergies and more efficiency in asset management are examples of examples of benefits in the future. Mitchell and Lehn (1990) conclude that the assumption that managers undertake mergers with the eye on empire building does not hold.
The existing literature shows that in general mergers and acquisitions are value creating for shareholders. The joint value that is created is mainly because of the value creation for shareholders of the target firms. The articles of Bruner (2002), Bradley, Desai and Kim (1988), Ruback and Jensen (1983), Jarrel, Brickley and Netter (1988), Andrade et al. (2001) and Jensen (1987) examine if mergers and acquisitions are value creating for shareholders. They show that the joint value that is created is mainly because of the value creation for shareholders of the target firms. Moreover, only in 20-30% of all transactions, shareholders of the acquirer seem to obtain excess returns beyond the opportunity cost of capital (Bruner, 2002). Even when the acquirer pays a premium, the results by Ruback and Jensen (1983), Bruner (2002), Loughran and Vijh (1997) and Jensen (1987) on the shareholder returns of the acquirer show that the returns of acquirers are significantly small, zero or even negative.
Jarrel et al. (1988) claims that there is no empirical evidence that the value creation for shareholders is at the expense of stakeholders. During a merger or acquisition, resources are
rearranged efficiently, this results in real economic gains for shareholders. However, Andrade et al. (2001) findings show that in comparison to the peer companies in the industry, the merging
companies do not improve the long-term cash flow performance if a merger is undertaken.
This research examines if short-term shareholder value is created by the ESG performance of firms engaging in mergers and acquisitions. The hypotheses will be supported by the stakeholder maximization view and the learning theory. The shareholder expense point of view and the
stakeholder value maximization view on ESG performance are examined in the research by Deng et al. (2013) in which takeovers in the United States are being used in a time range.
The shareholder expense view is connected to the perspective of Freeman and McVee (2001). They state that shareholders lose value if managers invest in ESG activities with the aim to increase the values of stakeholders. Pagano and Volpin (2002) concluded that when the equity stake of the management is smaller, the interests of workers and managers are more aligned. Managers can create long-term contracts for the workers to decrease the attractiveness of a takeover. This research
provides a rational argument for the in-line interests of managers and workers within a takeover at the expense of shareholders. Furthermore, Waddock, Surroca and Tribo (2010) examine if intangible resources are an important factor in the link between corporate social performance and ESG
performance. They state that intangible resources are developed in the form of culture, reputation, human capital and innovation. The developments are stimulated by the corporate responsible performance and will eventually increase the corporate financial performances. This indicates that there is an indirect relationship between both performances. If the development of intangibles takes place, improvement on one performance can lead to an improvement of another performance, a “virtuous circle” (Waddock et al., 2010). Since intangible resources need to be created to have an effect from corporate performance to financial performance, only focus on stakeholder management is not financially beneficial.
However, Deng et al. (2013) show that the stakeholders maximization view holds, this states that the total wealth of shareholders increases, as firms invest more in ESG activities. Operations of firms have more support if they are more in line with the stakeholders interests.
This view is based on two theories: the theory of the firm and the contract theory. Sacconi (2012) supports these social contracts, where corporate governance models are affected by the social norm. For social contracts, ESG performance is used as the norm. This norm results in an equal spread of the surplus within a corporation after an interaction game between shareholders and stakeholders. Directors also adapt this social contract since they carry the responsibility of the firm and the use of social norms will justify their responsibilities. In case of an agency model, the shareholders would try to obtain the whole surplus. Using a social contract, this surplus would be equal for all the stakeholders.
Baker, Gibbons and Murphy (1997) supports both the theory of the firm and the contract theory. They state that in processes within a firm, reputations of parties and subjective reasoning can play an important role. Corporate governance, compensation, capital allocation and transfer pricing are examples of the processes. In most economic literature, the role of informal or implicit contract is
not acknowledged. The literature addresses only the role of formal, or explicit contracts, in processes.
Understandings between participants within an organization and norms form the basis for the informal contracts. Examples of informal contracts are: customer service continuation and
compliance of employee job security. Contracts in which the wages and interest are determined for employees and product warranties are examples of formal contracts.
Stakeholders can obtain the formal contracts by contributing to the firm through offering effort or key resources. By testing the interaction between the informal relational contracts and the formal assets ownership, Baker et al. (1997) found that assets ownership stimulates smooth informal relational contracts.
Since informal contracts are not confirmed by court, firms can deviate from the contracts without proceedings from stakeholders against the firm. This indicates that commitment is important within informal contracts and has a certain value. The commitment is positively connected to higher ESG performance and indicates that firms with higher ESG performance will more likely hold to the agreement in informal contracts. In comparison to firms with low ESG performance, stakeholders of firms with higher ESG performance will settle with less beneficial formal contracts and will be more incentivized to contribute key resources or effort due to this higher commitment. Shareholders and other stakeholders interests are more in line with each other in firms with higher ESG performance. Efficiency and profitability on the long-term are more likely to increase (Deng et al., 2013).
Moreover, Krueger (2014) concluded that lower agency problems within firms have a positive effect on the reaction of shareholders when ESG related news is brought to light. Along these lines, stock prices seem to rise if the actions of managers concerning ESG problems are related to this news.
A merger may affect formal and informal contracts that have been formed in the previous years where stakeholders will likely be disrupted. The stakeholders and the firms long-term
relationships are at risk, since the continuity in the new firm is not certain. This newly combined firm may put pressure on contract renegotiation, if this is necessary. For the merger to be a success, it is important that stakeholders are supportive within the completion process of mergers. Two factors can contribute to this success: the reliability of the degree of commitment to important stakeholders by the firm concerning informal contracts and the reliability of the degree of continuation of current relationships. In this way, shareholders wealth can be significantly influenced by the degree of ESG performance (Deng et al., 2013). If managers do not effectively manage the relationships with stakeholders, essential customers or employees will move away from the firm and this will reduce the value of the firm (Bekier, Bogardus & Oldham, 2001). Compared to firms with low ESG
performance, the satisfaction of stakeholders and the stakeholders benefits will be higher, if mergers are done by firms with high social responsibility.
This allows this research to form the first hypothesis:
Short-term shareholder value for shareholders of the acquirer is created by higher ESG performance of the acquiring firm.
Aktas et al. (2010) examined if the environmental and social performance of the target firm are value creating for acquirer and target shareholders. If there is a positive effect on the announcement returns of the acquirer when a target firm is acquired, which fulfills the ESG investing criteria, value should be created, related to environmental and social performance. To fulfill the criteria for ESG investing, targets should be able to deal with social and environmental risk.
The findings of Aktas et al. (2010) show that the higher performance of SRI by the target adds value for shareholders. The experiences and practices of the target may be a good lesson for the acquirer and this can be implemented in the new, combined, firm. This holds only if the SRI
strategies of the target are value enhancing, otherwise the lessons will not be value creating for the shareholders of the acquirer. Although the literature does not fully support that SRI activities are value creating, the learning effect can still be supported by the fact that higher environmental and social performance can signal higher quality of management, generate new opportunities within the market and improve the satisfaction of customers and employees.
The relationship between participants in the financial market and firms may also improve, due to activities related to environmental and social responsibilities. Investors, financial
intermediaries and bankers are examples of financial market participants. The possibilities for firms to use different sources of financing are obtained more easily by this reputation effect. It can also serve as a signal to acquire a firm with higher ESG performance. This signal indicates how much a firm wants to learn the environmental and social risk management, the screening abilities concerning environmental and social cases of the other firm (Aktas et al., 2010).
The previously mentioned outcomes show that the overall short-term value creation in mergers and acquisitions is mainly driven by the short-term shareholder value creation for
shareholders of the target firm. Besides from the fact that takeovers create short-term value for target shareholders, the willingness to learn from the experiences and practices of the acquirer could also be short-term value creating for target shareholders. The acquirer can learn from the abilities of the target firm and vice versa. Furthermore, Aktas et al. (2010) state that acquiring targets with higher environmental performance leads to more synergistic deals.
Upon this learning theory, the second hypothesis for this research is formed:
Short-term shareholder value for shareholders of the target is created by higher ESG performance of the acquiring firm.
3. Method
3.1 Event study
To examine whether the previous formed hypotheses are reliable, this research will be in the form of an event study in which the announcement of the takeover is seen as the event. De Jong (2007) wrote a paper on event study methodology, which will be used to estimate the abnormal returns around the announcement date. This research defines the abnormal returns as the returns on the stock minus the normal returns:
AR
it= R
it- NR
iTo examine the behavior of the stock returns, a benchmark model is used to calculate the abnormal returns. In this research, the S&P 500 stock index serves as a benchmark for the normal returns because this index consists of 500 large-cap companies in different industries. A wide spread of industries is being used ensuring that the S&P500 is an essential benchmark index for the stock market in the United States. The benchmark model that will be used in this research is the market model for calculations of the normal returns:
NR
it= a
i+ βi* R
mt The whole market model is defined as:
R
it= αi + βi * RMt + εit
where abnormal returns in this model are the prediction errors. αi and βi are the ordinary least squares
(OLS) estimates of the regression coefficients. Fama and French (2007) state that there is an equilibrium accounting, which is a limitation on the returns in active investing. Passive investors obtain
passive returns when the returns are measured before fees and other expenses. Compared to the passive benchmarks, the abnormal expected return,
a
i , is zero in the market model for the normal returns. Theabnormal returns βi is defined by the systematic risk of the firm, compared to the benchmark index
from day -200 to day -11. The announcement date of the merger or acquisition is day 0. Abnormal returns are calculated for the event period from day -3 to day 3.
Moreover, this research checks for abnormal returns by doing univariate analyses on different time ranges for day -5 to day 5 and for day -1 to 1. This research uses a seven-day time spread because the announcement of the merger or acquisition may not be immediately observed by the public, due to lag in the disclosure of the announcement to the public (De Jong, 2007). This time frame includes only trading days, since Molnar and Lyocsa (2017) state that only including trading days leads to more precise forecasts of volatility which leads to better performance of the model.
To get an equal weight for each firm, the average of the abnormal returns must be obtained. The following formulas are used to calculate the cumulative abnormal returns and the cumulative average abnormal returns.
CARi = ∑ 𝐴𝑅𝑖𝑡&&'
CAARi =
(
)∑ 𝐶𝐴𝑅𝑖
)' +,'
This research will test if the CAAR are significantly different from zero using a t-test in Stata. This will be tested for target and acquirer firms within deals with acquirers with high ESG performance and low ESG performance. Furthermore, the difference between the CAAR will be tested, if the CAAR difference in means is significantly different from zero using a two-sample t-test in Stata. This test shows if there is significant difference in CAAR between the two high and low ESG performance acquirers.
3.2 Sample
For the collection of merger and acquisition deals used in this research, the database Factset is used with a time range set from 01/01/2006 until 01/01/2016. This research does not include more recent deals, because the dataset used for the ESG rating is only available until 2016. Only deals that were announced and completed within the given time range are included. Only deals having a value of at least 1 million in USD, including estimates, have been included. Both the target and the acquirer are in the US and both companies are public companies, as Fairhust and Greene (2012) has done. An
indicator for the type of deal is that the acquirer obtains 50%, or more, of the target firm. This results in a total findings of 1504 deals, which is smaller in comparison to Deng et al. (2013) and Aktas et al. (2010) since this research only includes public and listed acquiring and target companies. In this way, the S&P500 index used in the market model can serve as a proper benchmark to public and listed companies. After the amount of total deals is obtained, the ESG score has to be assigned to the acquirers.
To collect data for the social corporate responsibility, this analysis uses the database MSCI ESG KLD STATS that can be found in the Wharton research data sets, as Fairhust and Greene (2020) and Deng et al. (2013) have done. The ESG measures the environmental, social and governance performance of a firm is build on the earlier mentioned seven dimensions. Each dimension has a selection of strengths and concerns and the ESG rating uses a binary scoring system to determine if the variable is significantly present. The seven dimensions previously mentioned include 60 strengths and concerns variables. Since the acquiring firms in the deals do not involve in the dimensions of controversial business issues, these dimensions are excluded. Alcohol, gambling, tobacco, firearms, military and nuclear power are the controversial business issues used by MSCI ESG KLD STATS.
In the years 2006 until 2010, the MSCI ESG KLD STATS database has researched all the positive and negative ESG performance indicators. In the years after 2010, the database introduced the industry-based key issue ratings models in which each firm in their primary industry is rated on 4 to 7 key issues. In this way, firms are only rated for a limited set of strengths and concerns ESG indicators that has been used in the years prior to 2010. If an indicator is not researched, the firm obtains a “NR” score for “Not Researched” (MSCI ESG RESEARCH, 2016).
The introduction of industry-based key issue ratings models makes it more difficult to construct a consistent ESG score for the years 2006 until 2016 since not all the ESG indicators have been rated after 2010. In order to reduce the sample size by the smallest fraction, this research constructs a score build on seven strength variables and six concern variables that are available for all the firms within the time frame. If this research had chosen more than 13 variables, the sample size would reduce significantly, leading to an unreliable research. All the seven dimensions of the ESG score are included in the chosen strength and concern variables.
The strength variables:
• Clean energy
• Union relations
• Employee involvement
• Health and safety concerns
• Health and safety strengths
• Management systems strengths
The concern variables:
• Negative economic impact
• Substantial emissions
• Health and safety concern
• Marketing-contracting concern
• Antitrust
• Product - other concerns.
All the strengths are summed, and all the concerns are subtracted to get a total score for each firm, as previously have been done by Deng et al. (2013) and Fairhust and Greene (2020).
In the sample, takeovers by multiple firms are excluded, because firms differ in ESG score and some variables are not rated for firms within the group of acquirers. If the acquirer did multiple takeovers within a year, only the first takeover of an acquirer in a specific year is included. The choice to exclude other takeovers in the same year by the acquirer is supported by the paper of Amburgey and Miner (1992). They conclude that independently of other factors, the probability of diversifying mergers in the future for a firm is increasing, when there is more structural decentralization. Their findings show that strategy is driven by structure and that the strategic behavior of the firm is composed by mergers and acquisitions. Since this research examines the value creation of all stakeholders, decentralization as a result of multiple takeovers in a specific year can make it more difficult to measure the changing relations and objectives within firms and to eventually form a good ESG score. The ESG score of the acquiring firm can be determined in the specific year of the announcement. Data for the abnormal returns is obtained from Factset, using price returns. Data on the control variables is also obtained from Factset and is determined at the fiscal year end prior to the announcement, as Deng et al. (2013) and Fairhust and Greene (2020) have done. Description of the variables is specified in the appendix in section seven of this research. The total sample size for which all the relevant data is available consists of 218 merger and acquisition deals within the United States. An explanation for the small sample size in this research compared to the existing literature on ESG performance of the acquirer is that the availability of all the ESG indicators within the time is limited. The studies of Deng et al. (2013) and Aktas et al. (2010) obtain ESG scores before the introduction of industry-based key issue ratings models in 2010, in these years, all the ESG indicators are available. This research uses a different time frame in which the availability of the ESG indicators
are limited after 2010. The selection of variables to construct consistent ESG scores for all the years decrease the sample size significantly compared to the existing literature (MSCI ESG RESEARCH, 2016).
3.3 Regressions
After obtaining the abnormal returns for both the acquirer and target firm, this research uses the following two OLS regressions to test the research question:
Regression 1: CAARaq = 𝛽0 + 𝛽1* ESGaq + 𝛽2*SIZEaq + 𝛽3*FCFq + 𝛽4*LEVaq + 𝛽5*TRANS
+ 𝛽6*CASH+ 𝛽7*IND + 𝛽8*HOST + 𝜀
Regression 2: CAARta = 𝛽0 + 𝛽1* ESGaq + 𝛽2*SIZEaq + 𝛽3*FCFaq+ 𝛽4*LEVaq + 𝛽5*TRANS+ 𝛽6*CASH + 𝛽7*IND + 𝛽8*HOST + 𝜀
Both regressions include error terms, 𝜀, and control variables that control for other variables that influence the CAR of the acquirer and the target. Since controlling for the target firm characteristics will decrease the sample size, this research will only control for the characteristics of the acquiring firm and the deal characteristics, following Aktas et al. (2010). The following two H0 hypotheses are tested:
H0: 𝛽*ESGaq = 0 H1: 𝛽*ESGaq > 0 and,
H0: 𝛽*ESGaq = 0 H1: 𝛽*ESGaq > 0
To isolate the effect of the ESG score on the CAAR, the following firm specific control variables are included: size, free cash flows, leverage. In this way, stock performance, due to the takeover, is not influenced by other factors than the ESG. In addition to this, the regression controls for deal characteristics using the control variable transaction value and the dummy values cash, hostile and
industry. Hereafter, the explanations for the implementation of the control variables are discussed.
Control variable size is included because the results of Moeller, Schlingemann and Stulz (2004) show that the CAR during the announcement period is negatively related to the size of the acquiring firm. The managerial hubris hypothesis supports this effect of size on the CAR. Negative dollar synergies are created and higher premiums are paid, if a larger acquiring firm takes over a target firm. Acquiring a larger target requires the use of more resources by the entrenched managers of the large acquirer. Due to this, firm size may be used as an argument against a takeover.
The control variables leverage and free cash flow are included using Jensen's (1976) free cash flow theory. Jensen (1976) discussed that between managers and shareholders, a conflict of interest exists, when a merger decision is incurred. Instead of paying out cash to shareholders, managers decide to spend it on the acquisition of a target. If managers of firms with high unused borrowing power and large free cash flows undertake the mergers, the benefits of the mergers are lower.
Masalus, Wang and Xie (2007) emphasize that managerial discretion is limited and future free cash flows are reduced due to higher debt levels. This indicates that leverage can serve as a governance mechanism. Moreover, firm performance can improve because managers are incentivized by leverage. Creditors have a certain control on the managers such that in financial distress, managers may lose their job. Managers are in this way more stimulated to keep their job and to contribute to the firm. On the other hand, managers can also positively relate better decisions by managers on takeovers to higher performance. Higher free cash flows may be an indication of these higher performances, this means that the expected direction of both control variables is hard to determine.
Based on the paper by Moeller et al. (2004), the transaction value variable is included. The
announcement returns of the acquiring firm increases as the relative deal size increases.
Jensen (1976) also found that the total gains are lower when the acquirer uses a diversification strategy, where a target in a different industry is acquired. If this holds, the free cash flow theory supports the use of the dummy industry. Morck, Shleifer and Vishny (1990) discussed how managers who act in their own interest, benefit at the cost of shareholders from diversification.
The all-cash dummy value is included and is derived from the perspective of Betton, Eckbo and Thorburn (2008) and Aktas et al. (2010). Their outcomes show that shareholders of the acquirer obtain higher abnormal returns if the method of payment is full cash.
The hostile dummy value is included based on the conclusions by Shleifer and Summers (1988). They discuss that during hostile takeovers, wealth is transferred from stakeholders to shareholders. Most of the takeover premium could consist of the aforementioned wealth transfer. From contracts with employees and suppliers, the ex post rents can be captured, due to the takeovers breach of trusts. Shareholders obtain most of the takeover premium and this can be justified by the increase in efficiency gains, resulting from the hostile takeover.
4. Results
4.1 Descriptive statistics
Univariate and multivariate analysis are done to examine if short-term shareholder value is created by the ESG performance of the acquirer. The full sample size is divided in two subsamples on the mean
and the median. This results in a subsample for deals with high ESG scores of acquirers and a subsample for low ESG scores of acquirers, following Deng et al. (2013) and Aktas et al. (2010).
The tables in section 1 show the summarized statistics of the full sample and the subsamples of the acquirer and target firm. Looking at Tables 1.11 and 1.12, the mean of size and leverage is significantly higher for the subgroup of high ESG score acquirers than for the subgroup of low ESG score acquirers when the sample is divided on the mean. This is in line with results by Luo and Flammer (2015) and Waddock and Graves (1997) who conclude that firms with higher value seem to have higher ESG performance. However, if the sample is divided on the median, Tables 1.12 and 1.13 show that this does not hold. The small mean for hostile shows that most of the deal attitudes of the acquirers are friendly within the sample.
Table 1.1
Table 1.2
Full sample. Summarized statistics of the target with the CAARtar in percentages
Table 1.3
Subsample on mean with high ESG acquirer. Summarized statistics of the acquirer with the CAARacq in percentages
Table 1.4
Subsample on mean with high ESG acquirer. Summarized statistics of the target with the CAARtar in percentages
Table 1.5
Subsample on median with high ESG acquirer. Summarized statistics of the acquirer with the CAARacq in percentages
Table 1.6
Subsample on median with high ESG acquirer. Summarized statistics of the target with the CAARtar in percentages
Table 1.7
Subsample on mean with low ESG acquirer. Summarized statistics of the acquirer with the CAARacq in percentages
Table 1.8
Subsample on mean with low ESG acquirer. Summarized statistics of the target with the CAARtar in percentages
Table 1.9
Subsample on median with low ESG acquirer. Summarized statistics of the acquirer with the CAARacq in percentages
Table 1.10
Subsample on median with low ESG acquirer. Summarized statistics of the target with the CAARtar in percentages
Table 1.11
T-Test for mean differences between subgroups on mean
t statistics in parentheses
Table 1.12
T-Test for mean differences between subgroups on mean
t statistics in parentheses
* p < 0.05, ** p < 0.01, *** p < 0.001
Table 1.13
T-Test for mean differences between subgroups on median
t statistics in parentheses
Table 1.14
T-Test for mean differences between subgroups on median
t statistics in parentheses
* p < 0.05, ** p < 0.01, *** p < 0.001
4.2 Univariate analyses
Table 2.1 shows mainly small negative effects on the CAAR of the acquirer for the full and subsamples on the median and mean around the announcement date. This holds for all the different time ranges and is supported by Ruback and Jensen (1983), Bruner (2002), Loughran and Vijh (1997) and Jensen (1987), their findings show that the returns of acquirers are small, zero or even negative around an announcement of a takeover.
However, the univariate results are not similar to those of Deng et al. (2013), who showed that acquirers with high ESG performance obtain positive CAARs compared to acquirers with low ESG performance and negative CAARs. The insignificant means on the time periods (-3,3) and (-5,5) show that there is no statistical evidence that takeovers create or destroy short-term shareholder value for shareholders of the acquiring firm. However, the significant negative mean for the full sample on the (-1,1) time period shows that takeovers are destroying shareholder value for shareholders of the acquirer, this is consistent with the shareholder expense view by Deng et al. (2013) and the conclusions by Pagano and Volpin (2002) and Waddock et al. (2010).
The stakeholder value maximization view by Deng et al. (2013) does not hold, as shown by the insignificance for the test for the mean difference between the subsamples.
Table 2.1
One sample T-test for significant CAAR of acquirer
Acquirer full sample High CSR acquirer subsample on mean Low CSR acquirer subsample on mean Difference between subsamples on mean Mean (-1,1) (-3,3) (-5,5) -0.3254872 0.122942 -0.0709465 -0.5190966 -0.2433315 -0.1574633 -0.2536448 -0.0782691 -0.0388427 0.2654518 -0.122942 0.1186206 T-value (-1,1) (-3,3) (-5,5) -2.1354 -1.2900 -0.9710 -1.7896 -1.6040 -1.3584 -1.4142 -0.6633 -0.4290 0.7730 0.7687 0.7205 P-value (-1,1) (-3,3) (-5,5) 0.0338 0.1984 -0.3326 0.0787 0.1141 0.1796 0.1593 0.5081 0.6685 0.4403 0.4429 0.4720 Acquirer full sample High CSR acquirer subsample on median Low CSR acquirer subsample on median Difference between subsamples on median Mean (-1,1) (-3,3) (-5,5) -0.3254872 0.122942 -0.0709465 -0.3198656 -0.0531428 0.0702462 -0.3434332 -0.3457623 -0.0731819 -0.0235676 -0.2926195 -0.0029357 T-value (-1,1) (-3,3) (-5,5) -2.1354 -1.2900 -0.9710 -1.7327 -0.4643 -0.8139 -1.3745 -2.1676 -0.5409 -0.0657 -1.3107 -0.0171 P-value (-1,1) (-3,3) (-5,5) 0.0338 0.1984 -0.3326 0.0850 0.6430 0.4169 0.1753 0.0349 0.5909 0.9476 0.1914 0.9864
Table 2.2 shows at a 1% significance level a positive and significant mean of the CAAR of the target. This holds for the full and subsamples based on the mean and median when a merger or acquisition is announced. There is statistical evidence for short-term shareholder value creation around an announcement of a takeover and this is in line with the findings by Bruner (2002), Bradley et al. (1988), Ruback and Jensen (1983), Andrade, Mitchell and Stafford (2001), Betton et al. (2008) and Jensen (1987); Jarrel, Brickley and Netter (1988),. This short-term value creation is the highest for the time frames closest to the announcement date (-1,1).
However, the insignificance between the different subsamples for all the time frames indicates that no additional short-term value is created for shareholders by the ESG performance of the acquirer, this does not support the learning theory by Aktas et al. (2010).
Table 2.2
One sample T-test for significant CAAR of target
Target full sample on mean High CSR acquirer subsample on mean Low CSR acquirer subsample on mean Difference between subsamples on mean Mean (-1,1) (-3,3) (-5,5) 11.53981 6.904886 4.913426 12.64576 7.189788 5.157128 11.12943 6.799167 4.822995 -1.51633 6.904886 -0.3341332 T-value (-1,1) (-3,3) (-5,5) 10.9173 12.5613 11.3694 4.3586 5.3704 4.7780 11.3985 11.9340 10.9840 -0.6365 -0.3151 -0.3428 P-value (-1,1) (-3,3) (-5,5) 0.0000 0.0000 0.0000 0.0001 0.0000 0.0000 0.0000 0.0000 0.0000 0.5251 0.7530 0.7321 Target full sample High CSR acquirer subsample on median Low CSR acquirer subsample on median Difference between subsamples on median
Mean (-1,1) (-3,3) (-5,5) 11.53981 6.904886 4.913426 10.6205 6.335822 4.475317 14.47454 8.721511 6.312005 3.854045 2.385689 1.836688 T-value (-1,1) (-3,3) (-5,5) 10.9173 12.5613 11.3694 9.1871 11.1094 9.8200 5.9560 6.2525 5.9222 1.5590 1.8601 1.8209 P-value (-1,1) (-3,3) (-5,5) 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.1204 0.0642 0.0700
4.3 Multivariate analyses
4.3.1 Correlation
To generate a clearer vision on the short-term shareholder value creation by the ESG
performance of the acquirer, other variables on firm and deal characteristics that influence the effect on the CAAR during a takeover have to be taken into account. Table 3.1 and Table 3.2 checks the correlation between the variables within the regressions and shows that the
correlation between all the variables is small. Thereby, non-multicollinearity is proved. In case of multicollinearity, the parameter estimates are unreliable and the power of the test of the hypothesis is low (Bello, 2008).
The correlation between Lev and FCF is significant at 10% level and can be supported by Masalus et al. (2007), managerial discretion is limited and future free cash flows are reduced due to higher debt levels. The non-significant correlation on the ESG score in both samples indicates that the CAAR, obtained by following the study of De Jong (2007), is not explained by the ESG performance of the acquirer.
Table 3.1
Pairwise correlations of regression 1
Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (1) CAARacq 1.000 (2) ESG score 0.027 1.000 (3) Size -0.120 -0.018 1.000 (4) Lev 0.011 0.019 0.257* 1.000 (5) FCF -0.127 0.073 0.082 -0.215* 1.000 (6) Trans 0.042 0.066 0.091 0.134* -0.023 1.000 (7) CASH 0.082 0.033 0.020 0.081 -0.050 0.119 1.000 (8) Industry -0.081 0.090 -0.032 -0.038 0.055 -0.112 -0.085 1.000 (9) Hostile 0.074 0.098 -0.016 0.036 -0.004 -0.109 0.013 0.111 1.000 *** p<0.01, ** p<0.05, * p<0.1 Table 3.2
Pairwise correlations of regression 2
Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (1) CARtar 1.000 (2) ESG score -0.020 1.000 (3) Size 0.149* -0.018 1.000 (4) Lev 0.038 0.019 0.257* 1.000 (5) FCF 0.018 0.073 0.082 -0.215* 1.000 (6) Trans 0.013 0.066 0.091 0.134* -0.023 1.000 (7) CASH 0.048 0.033 0.020 0.081 -0.050 0.119 1.000 (8) Industry -0.152* 0.090 -0.032 -0.038 0.055 -0.112 -0.085 1.000 (9) Hostile 0.022 0.098 -0.016 0.036 -0.004 -0.109 0.013 0.111 1.000 *** p<0.01, ** p<0.05, * p<0.1
4.3.2 Multiple regressions
This research runs two OLS multiple regressions using robust standard errors to solve the problem for heteroskedasticity. The first OLS regression on the CAAR of acquirers within the time range (-3,3) shows that a positive but insignificant coefficient at a 5% level. This
insignificance of the man explanatory variable does not support the stakeholder value maximization theory by Deng et al. (2013). All the coefficients on the control variables are also insignificant at a 5% significance level, except the positive coefficient on hostile. Shleifer and Summers (1988) state that wealth is transferred from the stakeholders to the shareholders, this supports the positive coefficient on hostile.
The second regression on the CAAR of the target within the time range (-3,3) shows a negative and insignificant coefficient on ESG score at a 5% significance level. This result does not support the learning theory by Aktas et al. (2010). All the coefficients of the control variables are also insignificant at a 5% level except the negative coefficient on industry. The findings by Morck et al. (1990) support this negative coefficient on industry but contradicts the results by Jensen (1976). The insignificant coefficients on ESG score show that the
assumption made in this research, that there exists a relation between the abnormal returns for shareholders around the announcement date and ESG performance of the firms, does not hold.
Table 4.1
Regression 1 with CAARacq in (-3,3) as dependent variable and ESG score, size, lev, fcf, trans, cash, ind and host as independent variables, robust
(1) (2) (3) (4) (5) (6) (7) (8)
CAAR
acq CAAR acq CAAR acq CAAR acq CAAR acq CAAR acq CAAR acq CAAR acq
ESG score 0.0297 0.0274 0.0263 0.0365 0.0332 0.0310 0.0385 0.0301 (0.56) (0.52) (0.50) (0.70) (0.62) (0.59) (0.71) (0.58) Size -0.0892 -0.0977 -0.0846 -0.0868 -0.0867 -0.0879 -0.0869 (-1.47) (-1.58) (-1.54) (-1.58) (-1.58) (-1.60) (-1.58) Lev 0.346 0.111 0.0687 0.0350 0.0320 -0.00227 (0.64) (0.19) (0.12) (0.06) (0.05) (-0.00) FCF -1.700 -1.695 -1.656 -1.611 -1.606
(-1.00) (-0.99) (-0.99) (-0.97) (-0.97) Trans 0.0305 0.0253 0.0203 0.0264 (0.66) (0.54) (0.44) (0.57) CASH 0.207 0.192 0.186 (1.03) (0.95) (0.92) Industry -0.204 -0.226 (-1.07) (-1.17) Hostile 1.194* (2.30) _cons -0.128 0.665 0.584 0.736 0.599 0.550 0.680 0.654 (-1.32) (1.12) (0.96) (1.13) (0.86) (0.81) (0.99) (0.94) R2 0.001 0.015 0.017 0.030 0.032 0.037 0.042 0.048 *** p<0.001, ** p<0.01, * p<0.05 Table 4.2
Regression 2 with CAARtar in (-3,3) as dependent variable and ESG score, size, lev, fcf, trans, cash, ind and host as independent variables, robust
(1) (2) (3) (4) (5) (6) (7) (8)
CAARt
ar CAAR tar CAAR tar CAAR tar CAAR tar CAAR tar CAAR tar CAAR tar
ESG score -0.126 -0.110 -0.110 -0.114 -0.114 -0.122 -0.0338 -0.0575
(-0.20) (-0.18) (-0.18) (-0.18) (-0.17) (-0.19) (-0.05) (-0.09)
(1.57) (1.41) (1.32) (1.29) (1.29) (1.28) (1.28) Lev -0.00388 0.0825 0.0770 -0.0471 -0.0834 -0.181 (-0.00) (0.02) (0.02) (-0.01) (-0.02) (-0.04) FCF 0.625 0.625 0.769 1.296 1.312 (0.11) (0.11) (0.14) (0.24) (0.24) Trans 0.00400 -0.0151 -0.0742 -0.0570 (0.02) (-0.06) (-0.27) (-0.20) CASH 0.764 0.590 0.572 (0.63) (0.50) (0.48) Industry -2.406* -2.467* (-2.16) (-2.23) Hostile 3.386 (1.30) _cons 6.927*** 1.223 1.224 1.168 1.151 0.971 2.495 2.423 (12.78) (0.35) (0.38) (0.37) (0.37) (0.31) (0.78) (0.76) R2 0.000 0.022 0.022 0.023 0.023 0.025 0.046 0.047 *** p<0.001, ** p<0.01, * p<0.05
4.3.3 Alternative analyses
To check if the regressions in section 4.2.2 are influenced by the credit crisis, this research runs a new regression in which the years 2007 up to and including the year 2010 are excluded from the sample. Duchin, Ozbas and Sensoy (2009) found a decline of 6.4% of corporate investments. The access to external finance decreases because of this negative shock. Firms that are financially constrained or have high net short-term debt or low cash reserves are largely affected. In this way, only high value firms would undertake mergers or acquisitions such that this may lead to reverse causality (Luo & Flammer, 2015; Waddock & Graves, 1997).
Table 4.3 shows that none of the variables are significant for the first regression, these results are not supported by the stakeholder maximization theory by Deng et al. (2013). However, table 4.4 shows that the positive and significant coefficient on ESG score at a 5% significance level supports the learning theory by Aktas et al. (2010) that short-term
shareholder value is created for shareholders of the target firm by the ESG performance of the acquirer. The coefficient on size is positive and significant, this contradicts the outcome by Moeller et al. (2004).
Furthermore, this research runs an alternative regression for the five recent years to test the grown importance of ESG performance of firms throughout the last years. The result in table 4.5 shows that the coefficient on ESG score for regression 1 is negative and
insignificant, this does not support the stakeholder value maximization theory by Deng et al. (2013). The free cash flow theory by Jensen (1976) is consistent with the negative and significant coefficient on FCF
The coefficient on ESG score in table 4.6 is insignificant and positive which does not support the learning theory by Aktas et al. (2010). The negative and significant coefficient on
trans is not supported by Moeller et al. (2004) and the positive and significant coefficient on
cash is supported by Aktas et al. (2010) and Betton et al. (2008). The insignificant coefficients are against the expectation of increasing awareness regarding ESG performance, since firms consider it important for their strategy to identify issues on sustainability in the last recent years (Khan, Serafeim & Yoon, 2016)
Table 4.3
Regression 1 excluding credit crisis with CAARacq in (-3,3) as dependent variable and ESG score, size, lev, fcf, trans, cash, ind and host as independent variables, robust
(1) (2) (3) (4) (5) (6) (7) (8) CAAR acq CAAR acq CAAR acq CAAR acq CAAR acq CAAR acq CAAR acq CAAR acq
ESG score 0.0153 0.0288 0.0249 0.0308 0.0303 0.0306 0.0278 0.0276 (0.16) (0.30) (0.25) (0.31) (0.30) (0.31) (0.27) (0.27) Size -0.116 -0.122 -0.121 -0.121 -0.121 -0.118 -0.119 (-1.56) (-1.62) (-1.60) (-1.59) (-1.58) (-1.52) (-1.51) Lev 0.432 0.296 0.292 0.283 0.285 0.287 (0.56) (0.36) (0.35) (0.34) (0.34) (0.33) FCF -0.798 -0.795 -0.806 -0.851 -0.849 (-0.48) (-0.47) (-0.48) (-0.49) (-0.49) Trans -0.0000080 5 -0.0000079 9 -0.0000072 3 -0.0000072 4 (-0.29) (-0.29) (-0.26) (-0.26) CASH 0.0309 0.0309 0.0303 (0.11) (0.11) (0.11) Industry 0.0451 0.0457 (0.15) (0.15) Hostile -0.0248 (-0.02)
_cons 0.0343 1.067 0.927 1.061 1.076 1.066 1.030 1.030 (0.25) (1.58) (1.28) (1.36) (1.37) (1.34) (1.24) (1.23)
R2 0.000 0.026 0.029 0.031 0.032 0.032 0.033 0.033
*** p<0.001, ** p<0.01, * p<0.05
Table 4.4
Regression 2 excluding credit crisis with CAARtar in (-3,3) as dependent variable and ESG score, size, lev, fcf, trans, cash, ind and host as independent variables, robust
(1) (2) (3) (4) (5) (6) (7) (8)
CAAR tar CAAR tar CAAR tar CAAR tar CAAR tar CAAR tar CAAR tar CAAR tar
ESG score 0.956 0.847 0.898 0.972 0.964 0.979 1.176 1.228 * (1.60) (1.44) (1.52) (1.64) (1.62) (1.65) (1.97) (2.04) Size 0.932* 1.016* 1.032* 1.037* 1.043* 0.889 0.910 (2.07) (2.24) (2.27) (2.28) (2.29) (1.95) (1.98) Lev -5.595 -7.305 -7.377 -7.900 -8.046 -8.496 (-1.20) (-1.47) (-1.48) (-1.58) (-1.63) (-1.70) FCF -10.04 -9.987 -10.59 -7.361 -7.831 (-1.00) (-1.00) (-1.06) (-0.73) (-0.77) Trans -0.000142 -0.000138 -0.000192 -0.000190 (-0.86) (-0.84) (-1.17) (-1.15) CASH 1.696 1.694 1.817 (1.04) (1.06) (1.12)
Industry -3.208 -3.342 (-1.87) (-1.93) Hostile 5.360 (0.66) _cons 5.772*** -2.543 -0.732 0.961 1.218 0.652 3.189 3.188 (6.85) (-0.62) (-0.17) (0.21) (0.26) (0.14) (0.66) (0.66) R2 0.026 0.069 0.083 0.093 0.100 0.111 0.145 0.149 *** p<0.001, ** p<0.01, * p<0.05 Table 4.5
Regression 1 for the five recent years with CAARacq in (-3,3) as dependent variable and ESG score, size, lev, fcf, trans, cash, ind and host as independent variables, robust
(1) (2) (3) (4) (5) (6) (7) (8)
CAAR acq CAAR acq CAAR acq CAAR acq CAAR acq CAAR acq CAAR acq CAAR acq
ESG score -0.162 -0.130 -0.135 -0.150 -0.146 -0.134 -0.200 -0.200 (-1.30) (-1.07) (-1.08) (-1.26) (-1.21) (-1.11) (-1.57) (-1.57) Size -0.210 -0.206 -0.231 -0.232 -0.247* -0.200 -0.200 (-1.80) (-1.72) (-2.02) (-2.01) (-2.13) (-1.69) (-1.69) Lev 0.274 -0.553 -0.428 -0.637 -0.781 -0.781 (0.25) (-0.49) (-0.37) (-0.54) (-0.67) (-0.67) FCF -4.552* -4.513* -4.771* -5.224* -5.224*
(-2.15) (-2.11) (-2.22) (-2.45) (-2.45) Trans -0.0485 -0.0807 -0.0581 -0.0581 (-0.53) (-0.84) (-0.61) (-0.61) CASH 0.395 0.418 0.418 (1.04) (1.12) (1.12) Industry 0.569 0.569 (1.47) (1.47) Hostile 0 (.) _cons 0.417 2.449* 2.284 3.519* 3.755* 4.046* 3.408* 3.408* (1.75) (2.12) (1.70) (2.51) (2.53) (2.68) (2.20) (2.20) R2 0.044 0.123 0.124 0.229 0.236 0.261 0.309 0.309 *** p<0.001, ** p<0.01, * p<0.05 Table 4.6
Regression 2 for the five recent years with CAARtar in (-3,3) as dependent variable and ESG score, size, lev, fcf, trans, cash, ind and host as independent variables, robust
(1) (2) (3) (4) (5) (6) (7) (8)
CAAR tar CAAR tar CAAR tar CAAR tar CAAR tar CAAR tar CAAR tar CAAR tar
ESG
score 0.308 -0.118 0.0912 -0.0230 0.119 0.353 1.159 1.159
Size 2.831* 2.674* 2.479* 2.441* 2.150 1.576 1.576 (2.39) (2.23) (2.10) (2.16) (1.99) (1.47) (1.47) Lev -10.64 -17.02 -12.56 -16.59 -14.83 -14.83 (-0.95) (-1.47) (-1.10) (-1.51) (-1.41) (-1.41) FCF -35.13 -33.73 -38.73 -33.18 -33.18 (-1.61) (-1.61) (-1.94) (-1.72) (-1.72) Trans -1.744 -2.367* -2.644** -2.644** (-1.96) (-2.65) (-3.06) (-3.06) CASH 7.651* 7.366* 7.366* (2.17) (2.18) (2.18) Industry -6.962 -6.962 (-1.99) (-1.99) Hostile 0 (.) _cons 7.939** -19.48 -13.08 -3.554 4.966 10.59 18.39 18.39 (3.19) (-1.66) (-0.97) (-0.25) (0.34) (0.75) (1.31) (1.31) R2 0.002 0.138 0.160 0.220 0.301 0.390 0.459 0.459 *** p<0.001, ** p<0.01, * p<0.05
5. Discussion
5.1 Conclusions
This research has examined if short-term shareholder value is created for shareholders of the acquiring and target firm by using the ESG performance of the firm engaging in mergers and acquisitions. After the existing literature has been studied, two hypotheses were formed and different univariate and multivariate analyses were done to test these hypotheses.
The univariate analysis shows that takeovers significantly lower short-term shareholder value in the time range of (-1,1) for shareholders of the acquiring firm. For shareholders of the target firm, takeovers create short-term shareholder value within all the time frames. The results of the univariate and multivariate analyses show that the stakeholder maximization view (Deng et al., 2013) and the learning theory (Aktas et al., 2010) do not hold. Furthermore, two alternative analyses are conducted. However, the learning theory by Aktas et al. (2010) is supported in the alternative analysis in which the years of the credit crisis are excluded. This research indicates that there is no short-term shareholder value creation for shareholders of the acquirer by the ESG performance of the acquiring firm. However, the short-term shareholder value creation for shareholders of the target firm by the ESG performance of the acquirer is disputable.
Overall, the findings in this research show that the assumption made in the
introduction, that there exists a relation between the abnormal returns for shareholders around the announcement date and ESG performance of firms, does not hold.
5.2 Limitations and future research
One of the limitations in this research is the small sample of 218 mergers and acquisitions. Due to the small size of this sample the representativeness of the research may be at stake. To verify if the small sample size affects this research, in future studies it should be conducted with a higher sample size. The small sample size was consciously chosen because the available data for ESG scores is incomplete.
In relation with the abovementioned limitation, the limited number of variables can be seen as the second major limitation of this research. Not all the variables are available for all the acquirers within the time frame of this research. The ESG score is a decisive factor and this ESG score is constructed based on 13 variables used in the MSCI ESG KLD STATS. The
ESG score could have altered if different variables were used, although this would have reduced the sample size greatly. If more ESG scores could be obtained for acquirers for the selected deals in the time frame, future research could be more representative for the question if short-term shareholder value is created by the ESG performance of firms.
In addition to this, the limited existing literature on short-term shareholder value creation by ESG performance using a mergers and acquisitions framework, is another limitation for this research. Altogether, the previously mentioned limitations can be an
explanation for the counter evidence found in this research, compared to the assumption that a relation exists between the abnormal returns for shareholders and ESG performance.
A recommendation for future research could be to investigate why the assumption of a relation between abnormal returns and ESG performance does not hold. The apparent
limitations could imply that the time-scope of the study could be adjusted. In addition, the induced representation of ESG performance by the limited set of variables could be compared to the representation of other ESG performance scores used in previous research.
Furthermore, using a different database to obtain the ESG performance for the acquirer could strengthen the credibility of future research. Different databases construct different samples, based on different variables. In this way, the ESG score of the acquirers could differ from this research. Aktas et al. (2010) have used the Innovest database, in which acquirers are rated on three different dimensions: social (SOC), environmental (ENV) and Intangible Value Assessment (IVA). However, the person who conducted this research had no access to this Innovest database.
Another interesting suggestion for future research is to conduct research on long-term value creation for shareholders, as Deng et al. (2013) have done. Their results show that shareholders wealth increases due to long-term efficiency and profitability.
Finally, a suggestion for future research is to conduct an in-depth analysis for each part of the environmental, social and governance dimension if this has an effect on the
abnormal returns around an announcement of a takeover. The study of Lee, Lee and Li (2012) shows that the effect on relationship quality differ between the dimensions of ESG. The effect on the relationship outcomes is highly affected by the relationship quality. Mergers and acquisitions lead to major organizational changes in which stakeholders are affected by the expansion or contraction of resources.
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