Abstract

This paper examines the role of ESG ratings in a merger and acquisition (M&A) context. It attempts to answer two research questions: 1) whether mergers and acquisitions help improve the ESG performance of poorly ESG-rated acquiring companies that acquire target firms with a higher ESG ratings, and 2) whether the market places a premium on the acquisition of high ESG-rated firms. To test the related hypothesis, for our first research question, we consider the three ESG pillars (environmental, social and governance performance) along with the ESG combined score and the ESG controversies score and examine the impact of a given M&A deal on ESG-ratings one year after the acquisition, in line with prior research that shows that ESG rating changes take time to be incorporated within the acquiring firm. We find mixed results: only certain ESG rating factors change after an acquisition, whereas others do not. For the second part, we estimate two types of regressions; one that focuses on deal premium and how it relates to the ESG ratings differential between the acquiring firm and the target firm, and one that relates the cumulative abnormal returns (CARs) to the ESG ratings differential. In the first regression, we find significant evidence of the deal premium being positively impacted by the ESG ratings differential, while the second regression shows that the ESG ratings differential does not necessarily lead to higher CARs for acquiring firms.