The sustainable development trend in environmental, social, and governance issues and stakeholder engagement: Evidence from mergers and acquisitions in China

Abstract

AbstractThis study investigates how potential target firms' environmental, social, and governance (ESG) performance affects bid premiums during the merger and acquisition (M&A) process. Using a sample of 5658 M&A deals between 2009 to 2020, we provide new evidence that target firms' ESG rating is positively correlated to bid price, particularly when the target firm scores highly on their singular environmental and governance ratings, whereas the targets with high single social ratings alone are not correlated to bid price. Our results also implied that when the target has lower environmental and governance performance, M&A deals are less likely to face bid premiums. We additionally find that the target firms of non‐state‐owned enterprises (non‐SOEs) are more likely to have a higher bid price as opposed to state‐owned enterprises' (SOEs) target firms. Additionally, we find that targets' ESG rating is positively correlated to target shareholder value creation, as well as being positively correlated to short bid deal negotiation times. Overall, our findings are in line with target‐resistance theory, which states that high ESG performance targets can use their ESG advantages to increase their bid price, as well as increase stakeholder engagement and generation of post‐M&A synergy.