Jan Elbers (S3597547) 16.06.2020
1 Corporate Social Responsibility and Acquisition Performance:
The bidder and target perspective on sustainable takeovers.
Executive Summary
Corporate social responsibility (CSR) has become an important topic in today’s business environment. Changes in regulation on non-financial disclosure and a growing demand in sustainable investment assets confirm its relevance and indicate a trend towards more sustainable strategies. The purpose of regulations such as the non-financial reporting directive (Directive 2014/95/EU) is to create transparency and incentivize companies to develop responsible business processes.
CSR is a complex and far reaching concept that could be defined by the three pillars Environmental, Social, and Governance (ESG). To allow for an objective comparison between firms’ levels of CSR, rating agencies and providers of financial information developed scoring systems to categorize firms according to these dimensions. For my study I used the Thomson Reuters ESG scores to differentiate between high and low CSR firms. These scores can obtain values between 0 and 100 and are also used in similar studies. The reason to study CSR in the context of acquisitions is because it is one of the main growth strategies, embodies high strategic relevance in terms of the firm’s outlook, and consequently can have huge impact on shareholder value. Additionally, there is little knowledge about CSR in relation to M&A, wherefore this study contributes to the existing literature on CSR by providing new insights in the context of acquisitions.
The particular relevance of this study excels through information managers can use to improve the target selection process, policy makers to reform regulation, and all other stakeholders to become aware about the extent they are influenced by business processes. Essentially, this study falls back on stake- and shareholder theory, where stakeholders consider CSR a value enhancing investment to the good of society, while shareholders consider disproportionate investments in CSR as inefficient and consequently a wealth transfer to stakeholders.
To get a better understanding on how CSR activity is perceived in the context of acquisitions and whether the share- or stakeholder perspective deserves more validity, a two-step analysis has been created. First, the event study methodology was applied to obtain a performance measure that reflects the potential increase in firm value for acquiring and target shareholders. Second, a multivariate regression has been conducted, which considers all three dimensions of ESG, firm- and deal specific characteristics as well as the prevailing macroeconomic conditions.
2 positive abnormal returns for acquirer (0.11%), these are too small to be of economic relevance. However, the claim that the whole value of a M&A transaction is transferred to target shareholders is strongly supported by the results of the event study.
Nevertheless, recent studies on the CSR-M&A relationship find that acquiring firms not only earn significant positive abnormal announcement returns, but also reveal better long-term operating as well as stock performance, need less time to complete a deal and are less likely to fail. These findings distort the picture on M&A, wherefore this study goes a step further and specifically investigates in how far CSR influences acquisition performance.
Four testable predictions have been formulated. First, it is hypothesized that higher levels of CSR lead to higher abnormal announcement returns. This is based on the predominant findings of positive value creation in acquisitions related to CSR. Due to the cost-benefit concerns of investors, originating from different views on CSR, it seems as if none of the perspectives alone can exist, but some balance must be achieved. Therefore, the second hypothesis prognosticates that only firms with moderate ESG ratings experience positive abnormal announcement returns. The third prediction takes a closer look at the financial performance of acquiring firms prior to the acquisition. Literature hints towards decreasing marginal returns for those that already perfmon financially well. The last hypothesis looks at the different dimensions of ESG and specifically at governance, which appears to be the most essential one. This is because literature highlights the importance of strong governance and legal systems to encourage a balanced approach concerning the interests of stake- and shareholders.
The multivariate regression shows that acquirers are not influenced by their level of ESG, but targets experience a significant negative effect of -0.19% per unit increase in the overall ESG score. This is rather small considering an average CAR of 17%. Additionally, a nonlinear relationship as predicted by hypothesis two cannot be observed. Statistically significant results were only found for acquisitions where bidding firms have ESG scores between 50 and 75. Interesting, though, is the fact that acquirer are negatively impacted by the environmental dimension, while targets are negatively affected by the overall ESG score. Looking at differences in financial performance prior to the acquisition announcement reveals that investors of financially healthy firms seem to be indifferent when it comes to CSR. They neither reward firms with high nor punish those with low levels of CSR. Differences between the individual dimensions of ESG in terms of signaling power could not be identified. Which dimension prevails seems to depend on firm-, deal-, and macroeconomic characteristics.
