The cost of corporate social irresponsibility for acquirers

Abstract

Few studies have examined the reputational damage of environmental and social (E&S) scandals ex-post. Using an international sample of mergers and acquisitions (M&A) across 18 countries, we examine whether heightened E&S risks arising from acquirers’ E&S incidents affect the cost of acquisition. We find that the severity of the incident increases acquisition premium and this effect is explained by incident acquirers compensating target shareholders for heightened reputation risks, rather than seeking to repair their reputation through the acquisition. At the country level, incident acquirers in countries with stronger E&S standards and policies also experience higher premium. Further analysis shows that E&S incidents reduce shareholder value upon the announcement of an M&A and increase the time taken for M&A completion. Firms are less likely to make acquisitions after experiencing an E&S incident, but this decision depends on the cost of delay. Finally, we show that the adverse impact on acquisitions dissipates after six months.