The effect of ESG on value creation from mergers and acquisitions. What changed during the COVID-19 pandemic?

• DOI: https://doi.org/10.1108/CG-10-2020-0448
• Published date: 22 March 2021
• Date: 22 March 2021
• Pages: 1117-1141
• Subject Matter: Strategy,Corporate governance
• Author: Ioannis Tampakoudis,Athanasios Noulas,Nikolaos Kiosses,George Drogalas

The effect of ESG on value creation from

mergers and acquisitions. What changed

during the COVID-19 pandemic?

Ioannis Tampakoudis, Athanasios Noulas, Nikolaos Kiosses and George Drogalas

Abstract

Purpose –The purpose of this studyis to investigate the relationship between environmental,social and

governance (ESG) performance and shareholder wealth in the context of mergers and acquisitions

(M&As)before and during the coronavirus (COVID-19)pandemic.

Design/methodology/approach –This paper uses a sample of 889 completed M&Asannounced by

US firms between 1 January 2018 and 31 July 2020. Announcement abnormal returns are estimated

using an event study methodologyand the relation of ESG performance to shareholder value creation is

testedwith univariate and multivariate cross-sectionalregressions.

Findings –This study provides evidencefor a significant negative value effect of ESG performance for

the shareholders of acquiringfirms during the entire sample period. The negative effect appears to be

stronger, as the onsetof the COVID-19 crisis. This suggests that, during the pandemic-driveneconomic

turmoil,the costs of sustainability activities outweighany possible gains, providing evidence in supportof

the overinvestmenthypothesis.

Research limitations/implications –The results of the study have important implications for firms,

investors and policymakers.Firms should be more cautious with regard to extensive investmentsin ESG

activities, particularly during economic turmoil. For shareholders, the results suggest that ESG

engagement is not a resiliencefactor in an exogenous shock such as the COVID-19 pandemic.In terms

of policymaking, the sustainability disclosure frameworkshould remain voluntary allowing firms to report

material ESG-relatedissues. The main limitation of the study is related to data availabilityregarding ESG

performance.

Originality/value –To the best of the knowledge,this is the first study that investigates the effect of ESG

performance on shareholdervalue in the market for corporate control beforeand during the COVID-19

pandemic.

Keywords US, Event study, Abnormal returns, Mergers and acquisitions, Environmental,

Social and governance (ESG) performance

Paper type Research paper

1. Introduction

There is growing research interest among scholars, managers and policymakers in the

relationship between corporate social responsibility (CSR) and financial performance. The

existing empirical findings provide inconclusive evidence with regard to the effect of CSR

on firm performance. Drawing on stakeholder theory (Freeman, 1984) that provides the

basis for the alignment of interests between shareholders and other stakeholders, a strand

of the literature suggests a positive impact of CSR on financial performance (Aouadi and

Marsat, 2018;Awaysheh et al., 2020;Fatemi et al.,2018;Jo and Harjoto, 2011;Lins et al.,

2017;Mervelskemper and Streit, 2017). In contrast, shareholder theory highlights the main

corporate goal that is profit maximization and, from its perspective, CSR activities do not

generally serve the interests of shareholders(Friedman, 1970). A number of studies provide

Ioannis Tampakoudis is

based at the Department of

Business Administration,

University of Macedonia,

Thessaloniki, Greece and

Hellenic Open University,

Patra, Greece.

Athanasios Noulas and

Nikolaos Kiosse are both

based at the Department of

Accounting and Finance,

University of Macedonia,

Thessaloniki, Greece.

George Drogalas is based

at the Department of

Business Administration,

University of Macedonia,

Thessaloniki, Greece.

Received 5 October 2020

Revised 24 January 2021

28 January 2021

Accepted 2 February 2021

DOI 10.1108/CG-10-2020-0448 VOL. 21 NO. 6 2021, pp. 1117-1141, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 1117

evidence for shareholder theory, suggesting that CSR is negatively related to firm value

(Barnea and Rubin, 2010;Brammer et al.,2006;Cris

ostomo et al.,2011).

Mergers and acquisitions (M&As) constitute a major strategic decision for firms and may

significantly affect shareholder value (Tampakoudis et al.,2018). The initial announcement

and final completion of a merger deal affect the interests not only of shareholders but also

the interests of various stakeholders such as employees, customers, creditors and the

society, all of whom play a key role in the successful post-merger integration process.

Therefore, the market for corporate control provides a suitable setting to investigate the

value effects of CSR. Many studies examine the impact of CSR on shareholder value in the

M&A context, providing mixed findings (Deng et al.,2013;Fatemi et al., 2017;Krishnamurti

et al.,2020

;Yen and Andre

´, 2019;Zhang et al., 2020).

The onset of the COVID-19 pandemic triggered a severe economic crisis with

unprecedented effects on financial markets globally. During the first quarter of 2020, the

S&P lost more than 30% from its peak in mid-February, while the increased uncertainty

caused significant volatility in the stock prices of firms across all business sectors. In the

wake of the pandemic-driven crisis, there were voices in favour of the potential benefits of

the environmental, social and governance (ESG) performance of firms, suggesting that it

could be an important resilience factor during a period of increased economic uncertainty

(Albuquerque et al., 2020;Demers et al.,2020). Considering that many firms pursue M&A

deals as a growth strategy intendingto turn crisis into opportunity, the question that arises is

related to whether ESG has the potential to create shareholder value in the market for

corporate control during the pandemic-driven economic turmoil.

Our study intends to shed light on the relationship between ESG performance and acquirer

wealth effects in the context of US M&As prior to and during the COVID-19 pandemic. To

address the study objectives, we examine the wealth effects of 889M&A deals announced

by US firms from 1 January 2018 to 31 July 2020. We find an overall negative link between

ESG performance and the economic impact of M&As; however, the examination of the

results before and during the pandemic yields interesting findings. More specifically, we

present robust evidence that during the pandemic ESG performance is associated with

negative value effects for acquirer shareholders, which is consistent with the overinvestment

hypothesis (Barnea and Rubin, 2010). We apply difference-in-differences analysis to

identify possible differences between acquirers with different percentile scores. We find

negative results for high-ESG acquirers (above the 75th percentile), while for low-ESG

acquirers (below the 25th percentile) the announcement of a merger deal has positive

implications for shareholders. For the period before the pandemic, the negative effect of

ESG performance on acquirer excess returns is moderate. Hence, we reach the conclusion

that the negative relationship between ESG and shareholder value observed in the entire

period is mainly attributable to the COVID-19 pandemic. Evidently, after the outbreak of the

pandemic, the market believes that ESG activities are costly investments, which destroy

shareholder value for acquiring firms. Methodologically, the results of the study are robust

to a variety of model specifications, different market portfolio proxies and different event

windows used for the estimation of the announcementabnormal returns.

Considering that limited attention has been paid to social and environmental dimensions of

M&As (Aktas et al.,2011;Gomes and Marsat, 2018), our study contributes to the debate

focusing on the impact of ESG performance on the market reaction upon merger

announcements. What sets our study apart from related studies (Deng et al.,2013;Fatemi

et al., 2017;Krishnamurti et al.,2020;Yen and Andre

´,2019;Zhang et al., 2020), is that we

examine the effect of ESG on excess returns around the pandemic crisis. Our research

approach allows us to study the implications of ESG in the market for corporate control in

the most recent period and helps us to examine the evolution of such implications over

economic cycles. Our paper also adds new evidence to the literature by using an

alternative measure of CSR performance. UnlikeDeng et al. (2013) and Zhang et al. (2017),

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