Sustainability Metrics and Market Behavior: ESG's Effect on Stock Prices Post-M&A Announcements

Abstract

This thesis investigates the relationship between Environmental, Social, and Governance (ESG) metrics and stock market behaviors following a merger or acquisition (M&A) announcement, focusing on cumulative abnormal returns (CAR) and normalized standard deviation (SD). By analyzing the largest M&A transactions from 2023 and 2024, the study applies a statistical regression model in order to examine how ESG components influence market dynamics, both in aggregate and individual form. This is done while controlling for company specific, deal-related and macro variables in order to ensure robustness of the results. Our findings indicate an insignificant correlation of aggregate ESG scores and CAR following a M&A announcement. However, improvement on the Environmental factor seems to be positively correlated with greater CAR, indicating excess return to environmental practices. In addition, we also find that both the aggregate and individual components of ESG have a significant effect on stock price SD, ultimately demonstrating that ESG metrics influence M&A evaluations. This research advances the understanding of ESG’s role in shaping market reactions by building upon pre-pandemic findings and adding a dimension of volatility, offering a more nuanced perspective on the dynamics of risk and returns. Our findings underscore the importance of disaggregating ESG metrics, accounting for industry fixed-effects and considering external factors in order to accurately evaluate the impact on market dynamics.