Does ESG matter In corporate takeover?

Abstract

As Environmental, Social, and Governance scores (ESG) are increasingly becoming aware to the public, it is imperative to understand the impact of ESG on firm values, especially in the Asia-Pacific region, as it is home to a diverse and rapidly growing economy, including emerging markets. Therefore, the purpose of this study is to investigate the relationship between ESG and firm value using the takeover market as an empirical setting.

The primary focus of the study involves examining the influence of ESG on the occurrence of takeovers through binary logistic regression. Subsequently, the study explores the association between ESG and target firm shareholder wealth gain (measured by cumulative abnormal return - CAR) using a linear regression model. The findings suggest a positive relationship between ESG and the probability of a target firm being taken over, aligning with the concept of synergistic takeovers. However, it is also found that an excessive allocation of resources on ESG can not only diminishes the likelihood of a takeover but also reduces the wealth gain (CAR) for target shareholders during the takeover announcements.

In conclusion, a positive and significant relation is observed between ESG and the probability of takeover. Furthermore, a notable positive and significant association is found between ESG and shareholder wealth gain. Crucially, it is found that ESG square term has a negative and significant relation on ESG and CAR, i.e. - a non-linear relationship, showing that ESG has a diminishing effect on CAR. Therefore, the paper highlights the need for companies to maintain an ideal ESG standard to optimize target shareholder wealth gain in terms of corporate takeovers perspective.