The role of ESG in M&A takeover auctions

Abstract

This paper investigates the impact of ESG factors in takeover auctions. Utilizing a comprehensive dataset of bidding contests, it is revealed that ESG plays a crucial role in determining transaction value, can be associated with a higher success probability of bidding outcomes, and enhances the 12m post-merger M&A performance. Concretely, the results show that the presence of an ESG score has a significant impact on target company transaction value and increases the probability of successful acquisition bids by target companies. Additionally, the study discovers that in takeover auctions, an ESG score's magnitude is just as important as its simple existence. More specifically, higher ESG ratings are linked to higher target transaction prices, and bidders that have strong ESG ratings are more likely to win a takeover contest. It is apparent from the data that an acquiring company that is classified as a winner and takes over a target in possession of an ESG rating experiences a superior average financial performance of 38.53 basis points compared to the counterfactual peer group over 12 months following the merger. This scholarly investigation provides valuable insights for academia and practitioners alike, highlighting the significance of ESG considerations in the realm of M&A transactions.