The impact of targets' social performance on acquisition premiums

Abstract

This study examines whether the corporate social responsibility (CSR) performance of the target firms influences the acquisition premiums paid by the acquirers. Using U.S. public merger and acquisition (M&A) deals, I found that acquisition premiums increase in the targets' perceived CSR quality, an effect incremental to previously documented drivers of such premiums. These findings are robust to (1) using four proxies for CSR measures, and (2) using three proxies for acquisition premiums. Greater value-enhancing and synergistic capabilities of targets with superior quality CSR, acquirers' environmental, social and reputational risk protection needs, and market imperfections- related incorrect valuation of CSR activities are possible explanations for this observed positive association between targets' CSR and acquisition premiums. Analysis specific to each CSR attribute reveals that targets' environmental performance has positive and the strongest effects on acquisition premiums. In addition, superior-quality community and diversity influence acquisition premiums significantly and positively. However, this analysis does not indicate any consistent association between target firms' product attributes and acquisition premiums. Additionally and perhaps more strikingly, this investigation reports a significant negative association between targets' employee relations and acquisition premiums. Additional tests document that the positive association between target firms' perceived CSR quality and acquisition premiums is stronger for acquirers with high quality CSR and large targets. Overall, in this study, I combine the CSR and M&A literature by demonstrating that superior quality CSR performance affects acquisition premiums positively. Thus, this study expands our understanding of the value-enhancing role of CSR by studying the M&A market.