The effect of ESG on value creation from mergers and acquisitions. What changed during the COVID-19 pandemic?

Ioannis A. Tampakoudis · Athanasios G. Noulas · Nikolaos Kiosses · George Drogalas

70 citations0/0 files storedCorporate Governance

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Corporate Social Responsibility Reporting Corporate Finance and Governance Financial Reporting and Valuation Research

Abstract

Purpose The purpose of this study is to investigate the relationship between environmental, social and governance (ESG) performance and shareholder wealth in the context of mergers and acquisitions (M&As) before and during the coronavirus (COVID-19) pandemic. Design/methodology/approach This paper uses a sample of 889 completed M&As announced by US firms between 1 January 2018 and 31 July 2020. Announcement abnormal returns are estimated using an event study methodology and the relation of ESG performance to shareholder value creation is tested with univariate and multivariate cross-sectional regressions. Findings This study provides evidence for a significant negative value effect of ESG performance for the shareholders of acquiring firms during the entire sample period. The negative effect appears to be stronger, as the onset of the COVID-19 crisis. This suggests that, during the pandemic-driven economic turmoil, the costs of sustainability activities outweigh any possible gains, providing evidence in support of the overinvestment hypothesis. Research limitations/implications The results of the study have important implications for firms, investors and policymakers. Firms should be more cautious with regard to extensive investments in ESG activities, particularly during economic turmoil. For shareholders, the results suggest that ESG engagement is not a resilience factor in an exogenous shock such as the COVID-19 pandemic. In terms of policymaking, the sustainability disclosure framework should remain voluntary allowing firms to report material ESG-related issues. The main limitation of the study is related to data availability regarding ESG performance. Originality/value To the best of the knowledge, this is the first study that investigates the effect of ESG performance on shareholder value in the market for corporate control before and during the COVID-19 pandemic.

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References

2007The Social Responsibility of Business Is to Increase Its Profits 1985Using daily stock returns 2013Corporate social responsibility and access to finance 2017Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis 1969The Adjustment of Stock Prices to New Information 2003The Adjustment of Stock Prices to New Information 2013The Impact of Corporate Social Responsibility on Firm Value: The Role of Customer Awareness 2005A theory of reciprocity

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