The relationship between corporate sustainability and post-merger financial performance
LE3 .A278 2020
Bachelor of Business Administration
Growing concern around the effect corporate sustainability has on firm performance has individuals questioning their investment decisions and firms questioning their buying decisions. The ‘ESG Spotlight’ study done by Sustainalytics titled ‘ESG Compatibility: A Hidden Success Factor in M&A Transactions’, Systainalytics looked at how the compatibility of firms in terms of sustainability affected the success of a merger (Vezer & Morrow, 2017). Findings showed that in their sample, ESG compatible deals outperformed ESG incompatible deals by an average of 21% on a five-year cumulative return basis. In 2007, Fred Bereskin, Seong K. Byun, Michah S. Officer and Jong-Min Oh studied the effect corporate culture similarity has on merger decisions and post-merger performance (Bereskin, Byun, Officer, & Oh, 2017). They found that firms with greater corporate culture similarities were more likely to merge and produced greater synergies post-merger. This research looks at the relationship between corporate sustainability, using Thomson Reuters Environmental, Social and Governance (ESG) scores and post-merger financial performance. The companies that were used during this study were taken from the Standard and Poor’s 500 Index. Companies were used in the study if they completed a merger between January 1st, 2009 and December 31st, 2018 with six quarters of viable data pre and post-merger. Specifically, this study looks to test the correlation between the ESG score of an acquiring company and post-merger financial performance to see if sustainable firms have greater success in integrating another firm into their business. One regression incorporated a crisis dummy variable to control for the years 2009, 2010 and 2011 to eliminate changes in performance that were theresult of the 2008 financial crash. After controlling for firm size and deal value, results show that there is a positive relationship between a firm’s ESG score pre-merger and their XVTobin’s Q value post-merger. This data supports the current research question that there is a trend between corporate social responsibility and financial performance. There is a trade-off when it comes to corporations looking to evolve and develop sustainable business practices. Whether it be implementing new sustainability teams into the business or changing over products and production machinery to a more sustainable option, it all comes with a cost. This increase in cost might not be realistic for all businesses, especially ones that don’t know what the payoff will be. I hope that this research encourages businesses to incorporate ESG data into their decision-making process when looking to purchase another firm or when being acquired by another firm. This research shows that there is a risk when it comes to purchasing firms when you are not sustainably compatible and that it can be mitigated by incorporating ESG thresholds for both the acquiring company and the acquired company. Corporations should not ignore the fact that being more sustainable leads to greater returns post-merger. Moving forward, there is a lot of room for further research on this subject. As the literature review shows, there is a gap in research around mergers and acquisitions and corporate sustainability. Completing this study using European firms would be interesting as Europe is very advanced compared with the United States when it comes to corporate sustainability. It would also be interesting to flip the study and look at the ESG scores of the companies being acquired and if this has any effect on financial performance post-merger or the premium paid by the acquirer.
The author retains copyright in this thesis. Any substantial copying or any other actions that exceed fair dealing or other exceptions in the Copyright Act require the permission of the author.