Does environmental, social and governance performance affect acquisition premium?

Abstract

Purpose From a target perspective, this paper aims to examine the impact of environmental, social and governance (ESG) performance on mergers and acquisitions (M&A) transaction valuations. Design/methodology/approach This paper uses a sample of 629 international transactions conducted between 2002 and 2020. Ordinary least squares (OLS) regression was applied by using ESG aggregate score and the three ESG pillars: environment, social and governance. Findings This paper finds that the ESG performance of targets has a negative and significant impact on acquisition premiums. However, this paper finds that targets receive lower premiums by increasing their ESG score, suggesting that targets would do better to focus on ESG to increase shareholder wealth. Thus, results of this paper support the view that ESG-focused firms create shareholder value through the M&A process. Furthermore, results of this paper indicate that environmental and social aspects of ESG drive the acquisition premium. The governance score does not seem to be related to acquisition premiums. Originality/value To the best of the authors’ knowledge, this study is the first study to assess whether ESG performance impacts the valuation of M&A transactions by decomposing ESG into its three components.