Abstract

We test whether companies with better ESG performance make poorer merger and acquisition deals because they may limit their choices for targets with similar ESG performance or need to invest more into improving targets’ ESG performance, compared to acquirers with poor ESG performance. We also test whether companies with better ESG performance are more likely to pay CEOs lower percentage of equity-based compensation, and are more likely to adopt CEO duality since CEOs tend to be driven by stewardship in companies with better ESG performance. We find that acquiring companies with above-average ESG performance underperform those with below-average ESG performance and the finding is robust to controlling for bidder, target, and deal characteristics; acquiring companies with below-average ESG performance outperform those with above-average ESG performance in the long-term post-acquisition period as well; companies with better ESG performance pay CEOs higher percentage of equity-based compensation and the relation between CEO duality and companies’ ESG performance is insignificant and neither is the relation between CEO duality and M&A performance. Overall, our results show that firms with better ESG performance underperform firms with poorer ESG performance during and after M&A events. They also show that CEOs who work for high-ESG companies are not driven by stewardship. Our results imply that firms with good ESG performance do not make value-maximizing merger and acquisition deals nor have CEOs driven by stewardship.