When Does Corporate Social Responsibility Backfire in Acquisitions? Signal Incongruence and Acquirer Returns

Abstract

This study examines whether an acquirer’s pre-announcement corporate social responsibility (CSR) engagement can provide an insurance-like effect to preserve acquirer returns during the announcement of an acquisition event. Drawing on stakeholder theory and signaling theory, we posit that CSR engagement accrues positive moral capital for an acquirer and sends a positive signal indicating the acquirer’s altruism, both of which temper stakeholders’ negative responses and prevent a reduction in market returns around the announcement of an acquisition. However, high-CSR engagement could backfire when the acquirer makes a hostile takeover announcement. In-congruent signals between high-CSR engagement and the hostile practice are a sign of hypocrisy in the eyes of stakeholders, which can worry investors and hurt acquirer returns. By analysing 1,310 acquisition transactions from 2002–2012, the results of our event study show that high-CSR acquirers generally enjoy positive acquirer returns during their acquisition announcements, but negative returns when the acquisitions are hostile. These findings support the idea that CSR engagement can provide insurance-like benefits during an event that is often seen as “negative”, while also identifying signal in-congruence as an important boundary condition.

Keywords: Corporate Social Responsibility; Insurance-like Effect of CSR; Acquirer Returns; Mergers and Acquisitions; Signal In-congruence; Authenticity

JEL Classification: G43; M14