Improvement in sustainability: Evidence from the mergers and acquisitions market

Abstract

One approach to improve a firm’s Environmental, Social, and Governance (ESG) rating is to acquire a target with a higher relative ESG rating. We explore changes in an acquirer’s ESG rating around merger and acquisition (M&A) announcements and provide empirical evidence of a positive relationship between the change in an acquirer’s ESG rating and the target’s relative ESG rating. Of the three components of an ESG rating, an acquirer’s environmental rating displays the largest increase, with social and governance ratings exhibiting a smaller but still significant post-merger increase. This relationship is weaker for cross-border deals or cross-industry deals. However, deals that are both cross-border and same-industry are associated with a larger increase in an acquirer’s ESG rating. In addition to improved ESG ratings, the acquisition of a firm with a superior ESG rating is also associated with higher bid premiums and improved post-merger financial performance which suggests that acquirers act in shareholders’ best interests. JEL Classification: G14, G34