Corporate Social Responsibility and M&A

As M&A is an important form of corporate development, extant literature suggests M&A is taken as an approach to enhance acquirers’ value through integration with the target to create synergies in operation efficiency, financial advantage, economic of scale and strategic alignment (Al‐Sharkas, Hassan, & Lawrence, 2008; Auerbach & Reishus,

1987; Calipha, Tarba, & Brock, 2010). As CSR is argued to have impacts on a corporation’s value through the channel of influencing its business strategy (McWilliams

et al., 2006) and financial performance (Malik, 2015), studies pose the importance of CSR in the context of M&A from several perspectives, which can be mainly separated into four streams: the choice of targets, deal completion, post-M&A performance and wealth

effect.

For the effect of CSR on the choice of targets, the acquirer’s propensity to purchase a target with high or low CSR engagements differs under the capabilities-based theory.

The capabilities-based theory (Capron, 1999; Kaul & Wu, 2016) suggests two sources of creating value through M&A deals: deploying or accessing capabilities. If CSR is a capability the acquirer wants to gain from the target, there is higher probability for the acquirer to buy high CSR firms in hope to enhance the acquirer’s stakeholder management strategy (Wickert, Vaccaro, & Cornelissen, 2017). On the other hand, Berchicci et al. (2012) find evidence to support the fact that CSR is a capability the acquirer wants to deploy, and thus it prefers targets with inferior CSR qualities so that more potential gains would be created through the improvement of the acquired firm.

Researchers also find that targets’ reputation is a determinant to acquirers’ decision on target selection as it acts as a predictor of achieving market-based objectives (Dollinger, Golden, & Saxton, 1997; Saxton & Dollinger, 2004).

Studies also indicate that there exists a relationship between CSR and M&A completion. Deng, Kang, and Low (2013) find that comparing to low-CSR acquirers, high-CSR acquirers took less time to complete a merger and are also more likely to

succeed by analyzing the observed probability of completion and duration between announcement date and effective date. Arouri et al. (2019) use risk-arbitrage spreads as a proxy for deal uncertainty in M&As and concluded that M&As undertaken by high-CSR acquirers would be characterized by less uncertainty, resulting in higher probability of completion.

Existing literature also finds relation between CSR and post-merger performance.

Since stakeholders are affected by and aware of M&A activities, the post-M&A integration process is sensitive to stakeholder behavior that will ultimately cause impact on the acquirer (Kato & Schoenberg, 2014). Deng et al. (2013) use changes in operating cash flow to measure operating performance and finds that acquirers with high CSR performance enjoy larger increases in post-merger operating performance and realize positive long-term stock returns.

Whether CSR makes an impact on shareholder wealth is another stream of research under the M&A context. Liang, Renneboog, and Vansteenkiste (2017) find out there is a positive relation between shareholder returns and strong employee engagement in M&A deals. Deng et al. (2013) states that there would be higher returns for merger announcement and weighted-average portfolio of acquirers and targets in mergers

initiated by high-CSR acquirers because of greater stakeholder satisfaction. As this study exploits CSR research through the stream in shareholders’ wealth effect by focusing on how CSR makes an impact on M&A premiums, prior research by Gomes and Marsat (2018) and Qiao and Wu (2019) are closest to the topic.

Gomes and Marsat (2018) use an international sample of 588 M&A deals to study the association between targets’ CSR engagement and bid premiums. They apply CSR

information from ASSET4 database and find that the overall CSR performance as well as the two underlying dimensions, social and environmental performance, all pose a positive impact on M&A premiums. They further their research by distinguishing domestic and international M&A deals to examine the potential effect of cross-border nature. While acquirers generally assign value for environmental performance, they only approve social performance in cross-border deals. They argue targets’ CSR involvement helps reduce the acquirer’s exposure to information asymmetry and targets’ specific risk by revealing

more stakeholder information and higher CSR performance lessens harmful impacts caused by materialization of negative events. They also discover the impact of different CSR dimensions varies under domestic and international deals.

Qiao and Wu (2019) on the other hand, also conduct a research on the effect of target

firms’ CSR on acquisition premiums, but they focus on cross-border deals and use CSR

data from the MSCI ESG database. By analyzing a sample of 252 international acquisitions, they find a positive relation between targets’ CSR engagement and premiums. Hence, to complement the cross-border nature of their sample, they extend the research by investigating the moderating effect of institutional factors arising from differences in regulation, culture and social recognition. Results show institutional factors weaken the positive effect of CSR on premiums as the foreign acquirer would reduce the

value paid for CSR when institutional distance widens. The study explains the contribution of CSR to premiums from a strategic angle, indicating targets’ CSR helps

enhance corporation image, solidify the expansion base for business and obtain support from third party.

This research also aims to study the effect of targets’ CSR on M&A premiums but differs from Gomes and Marsat (2018) and Qiao and Wu (2019) in several domains. First, this paper examines how the acquirer evaluate targets’ CSR in a domestic setting where both targets and acquirers are U.S corporations. Focusing on domestic M&A deals largens the sample to 904 deals and concentrates the propositions on more profound determinates to the impact of CSR on premiums by eliminating interruptions from cross-border effect.

Second, different from Gomes and Marsat (2018), this study collects CSR information

from MSCI ESG database. Lastly, the development of this paper varies from prior studies and thus lead to different focus and interpretation on the relationship between targets’

CSR and M&A premiums. Gomes and Marsat (2018) develop its propositions through a risk management perspective for CSR reduces the targets’ specific risk in a deal. Qiao and Wu (2019) applies the resource-based perspective and institutional theory to

emphasize the impact of CSR as a strategic asset in a cross-border setting. This study, on the other hand, carves a new space from analyzing the cost and benefit of deriving targets’

CSR through the acquirer’s perspective, and posits the potential value-destroying effect

of CSR to shareholders in the acquiring firm.