CSR and M&A premiums

This study investigates CSR in the context of M&A by examining the impact of targets’ CSR performance on premiums in M&A deals. For an acquirer, one of the most crucial parts in an M&A deal comes to the determination of the bidding price for the target, and premiums refer to the extra price exceeding the target’s real market price that the acquirer is willing to pay (Simonyan, 2014). Premiums capture the intangible asset that is difficult for the market to identify and the synergetic sources the acquirer presumes to derive from integration of two parties. By applying the resource-based view in CSR related literature, companies engage in CSR for the purpose of sustaining competitive advantage by building reputation and enhancing stakeholder relations (Fombrun &

Shanley, 1990; Kato & Schoenberg, 2014; McWilliams & Siegel, 2011; Minor & Morgan, 2011). Therefore, CSR is most likely to be an important source of strategic asset that is difficult to price and identify because of its intangible nature (Parisi & Hockerts, 2008).

However, in the process of target valuation in M&A deals, as non-identifiable asset will be assessed, and CSR engagement would have an impact on synergies which result a difference in post-merger performance (Deng et al., 2013; Kato & Schoenberg, 2014),

premiums could be a fair measure to capture the value of CSR as an strategic asset of the target and how the acquirer evaluate its impact on post-merger integration.

Since the main purpose of M&A is to maximize shareholder wealth of the acquirer through strategic integration with the target (Al‐Sharkas et al., 2008; Calipha et al., 2010), premiums assigned by the acquirer would reflect whether the target’s CSR engagement is considered an asset to generate benefit for the shareholder or a cost that lead to a decrease in shareholder wealth. CSR engagement can be interpreted through the contract theory (Coase, 1952; Hodgson, 1998) which determines firms to be a nexus of contracts between its stakeholders in exchange of resources. That is, the target devotes itself to fulfilling its responsibility to related parties with its business and gains more support from its stakeholders. Since M&As involve a change in ownership of those contracts from the target to acquirer, those nexus of contracts developed by the target could be either valued or devalued by the shareholders of the acquiring firm under the different context of two opposing views on CSR, the stakeholder’s view and shareholder’s view.

By applying the stakeholder’s view (Freeman, 2010; McWilliams & Siegel, 2001),

the transfer of contracts from targets could be beneficial to the acquirer from three aspects in the M&A deal. First, targets’ CSR engagement enhances the acquirer’s reputation and

image by sending a message to the market that the acquirer treasures CSR engagement and is willing to maintain the CSR practice (Qiao & Wu, 2019). Second, targets’ CSR engagement presents a stronger stakeholders’ commitment and helps reduce deal uncertainty by gaining an easier access to stakeholders’ support for the M&A (Arouri, Gomes, & Pukthuanthong, 2019). Third, the contracts reinforce the acquirer’s ability to facilitate the process of post-merger M&A integration by alleviating obstacles in forming alliance with stakeholders, leading to larger synergies in operation performance (Deng et al., 2013). As a result, the acquirer would assign more value to targets’ CSR engagement and offers a higher M&A premium.

Alternatively, the nexus of contracts inherited from the targets would be troublesome and value-destroying under the shareholders’ view. From the shareholder’s view (Friedman, 1970; Jensen, 2001), the contracts demonstrate more obligations to fulfill, which indicate more resources being consumed for dedication to stakeholders other than the shareholders. As the maintenance of those CSR engagement can be costly and challenging in both implementing and reporting (Blowfield & Murray, 2014), the acquirer may consider those contracts a burden rather than an asset. Furthermore, if the inherent binding between the target and its stakeholders is strong and unshakable, the stakeholders

might oppose strongly to the shift of ownership which may put the existing contracts at stake. This would soar costs in negotiation and increase uncertainty to the deal, and the post-M&A integration would also become highly challenging as it is tough for the acquirer to meet the standards of the previous contracts and form alliance with targets’

stakeholders. Besides, from the capabilities-deployment perspective, the higher the CSR performance of the target, the lower the takeover gains could be produced from advancement of CSR practices. In this case, targets’ CSR engagement would be devalued by the acquirer and lead to a decrease in M&A premiums.

Although prior studies suggest there is a positive link between CSR and M&A premiums and stand for the stakeholder’s view (Gomes & Marsat, 2018; Qiao & Wu,

2019), they use an international sample of M&A deals and attribute the positive link to cross-border effect where international M&A deals are exposed to higher risk in information asymmetry resulting from culture and compliance difference. They argue that targets’ CSR engagement could offer positive signals such as higher goodwill and lower specific risk to improve acquirers’ knowledge, facilitate the completion, and further provide a base for expansion in a foreign country. However, since this study focuses on domestic M&A deals, the two firms do not encounter difficulties caused by difference in

language, culture or law compliance. Thus, the benefit brought by CSR engagement to decrease high risk of information asymmetry is diminished in a domestic setting. Apart from the different nature of sample, through a resource-based perspective, CSR engagement forms an strategic asset to sustain competitive advantage (Orlitzky et al., 2011) whose returns result in non-financial and intangible benefits that are highly uncertain and difficult to measure (McWilliams et al., 2006; Parisi & Hockerts, 2008). In contrast, the expenditure on maintaining CSR activities is certain in the divestment of resources from shareholders to stakeholders and CSR engagement might even cause conflicts between stakeholders and shareholders arising from agency problems (Barnea

& Rubin, 2010). Therefore, by using a domestic sample and introducing a deeper cost and benefit analysis of inheriting targets’ CSR, this study argues that the shareholder’s view

would fit more and the acquirer would devalue targets’ CSR engagement as the shareholder’s purpose in M&A deals is to maximize their own wealth (Calipha et al.,

2010).

The following hypothesis is proposed in an alternative form:

H1: Targets’ CSR engagement is negatively associated with M&A premiums.