ESG Performance - Effect on acquisition premium

Abstract

From a target perspective we investigate how environmental, social and governance (ESG) performance affects the premium paid in acquisitions. ESG has been growing in importance during the last decade, and reporting of non-financial data is increasing. Followingly, our goal is to determine whether ESG aspects are being valued by acquirors within mergers and acquisitions. In addition, we examine how the interaction between ESG performance and gender distribution of the acquiror’s board may affect the premium. Using a sample size of 509 deals from United States and Europe, during the years 2002-2021, we find a positive effect of ESG performance on the acquisition premium. Notably, only the overall ESG score, and governance performance of the target company had a significant positive impact on the acquisition premium. The results align with the stakeholder theory, indicating that investments in ESG friendly activities are beneficial for both shareholders and stakeholders. Further on, a negative impact on the acquisition premium is found while investigating the interaction between female board directors of the acquiring company and target companies’ environmental performance, indicating that when both variables coexist, it results in a lower premium paid ceteris paribus.