Pre-deal differences in corporate social responsibility and acquisition performance

Abstract

Drawing on the portability theory, we examine how the pre-deal gap in corporate social responsibility (CSR) between the bidder and target affects announcement returns in the international takeover market. We find that the higher the bidder's CSR scores relative to the target's, the higher is the synergy captured by combined cumulative abnormal returns of bidders and targets. It supports our hypothesis that synergistic gains are higher when the ex-ante bidder-target CSR gap is positive. The results also show that the synergy effect of CSR is not shared between bidder and target firms; thereby, bidders earn abnormal returns while targets lose. We further document that the acquirers with higher CSR practices before the acquisition are more likely to engage in related and non-cash-financed deals, and capital markets reward these acquisition choices. Finally, the results show that a positive CSR gap reduces the takeover premium and the time taken to complete the deal. Overall, the results suggest a positive valuation for the shareholders of the combined firm resulting from the portability of higher CSR practices from bidders to targets. Our results are subject to a battery of robustness tests, including alternative measures of combined returns and CSR, and tests for endogeneity.