Non-financial misconduct and M&A returns: Evidence from workplace misconduct

Abstract

We investigate the impact of non-financial misconduct on announcement returns, as well as the long-term market and operating performance. Utilizing workplace-related violation data, we find that while announcement returns are comparable for acquirers with and without workplace misconduct, the long-run buy-and-hold abnormal returns (BHARs) and operating performance are significantly negative for acquirers involved in workplace misconduct. This indicates that, at the time of the deal announcement, the market is largely unaware of the potential negative effects of workplace misconduct on the integration process and productivity of the combined firm. However, the market gradually reassesses the impact of these violations and reflects their negative impact on the lower average long-term abnormal returns of the acquirers' stocks. In additional analyses, we find that (1) the channel through which workplace misconduct affects M&A performance is the difficulty of integration and the resulting deterioration of employee productivity caused by such misconduct, (2) the effect is stronger among human capital-intensive acquirers, (3) workplace misconduct at target firms has a minimal effect on the long-term post-acquisition financial and operating performance, and (4) acquirers with workplace misconduct are more inclined to finance acquisitions through equity.