ESG in M&A: Investigating the Effect of Target ESG Performance on M&A Premiums

Abstract

This thesis empirically investigates whether acquirers pay an ESG premium in M&A transactions. Using OLS regression with industry-clustered robust standard errors, this study analyzes 1,070 global, cash-only M&A transactions involving public targets with an enterprise value of over $10 million from 2002 to 2024. Results reveal a significant negative relationship between target ESG performance and acquisition premiums, supporting the shareholder expense view: ESG does not enhance value for target shareholders in takeovers. The negative ESG-premium relationship is weaker in sectors highly exposed to ESG risks, such as energy, mining, agriculture, heavy industrial manufacturing, and financial services. This suggests that in such industries, ESG may serve as ‘insurance-like’ protection and lower target-specific risk. In cross-industry transactions, target ESG performance is marginally associated with higher premiums, implying that ESG reduces information asymmetry. No evidence was found that ESG reduces agency costs. Strong performance on the environmental and social dimensions of ESG is associated with significantly lower M&A premiums, while governance performance shows no significant effect. ESG does not appear to enhance a target’s bargaining position or influence a bidder’s willingness to pay. Instead, value from target ESG performance appears to accrue primarily to the shareholders of the acquiring firm at the expense of the target’s shareholders. These findings contribute to the ESG and M&A literature by providing robust evidence on the relevance of ESG in M&A pricing. Takeover targets should not pursue short-term ESG initiatives to drive up takeover prices. Acquirers, on average, don’t overpay for ESG. Targeting high-ESG firms can be a value-accretive acquisition strategy for buyers.