Reputational Concerns in the Market for Corporate Control

Abstract

This paper explores the association between reputational concerns and corporate acquisitions in the U.S. Using data from KLD Research & Analytics social performance dataset covering the 1996 to 2007 time period, we divide firms into four environmental reputation classifications: toxic, green, gray, and neutral. We find that toxic firms have a lower associated probability of being acquired even after controlling for firm and industry characteristics. We also document that acquirers account for reputation in their selection of target firms and are likely to acquire similar environmental reputation firms. Most notably, green firms in our sample never acquire toxic firms, though they do acquire gray or neutral firms. Acquirers that buy firms with differing environmental reputations use a higher percentage of stock in their acquisition offers. We further show that the returns to acquirers are more negative when they acquire firms outside of their area, which suggests that the acquirers lose value, on average, with these acquisitions. This negative effect is even more pronounced when an acquirer with an established green reputation acquires a non-green target. Collectively, these findings support the view that firm are concerned about their reputations and account for the reputations of targets in planning and structuring acquisitions.