The Cost of Corporate Social Irresponsibility for Acquirers

Abstract

Few studies have examined the spillover reputational damage of environmental and social (E&S) scandals ex-post. Using an international sample of negative E&S incidents and mergers and acquisitions (M&A) across 18 countries, we examine whether heightened E&S risks of acquirers post-incident affect the cost of acquisition. We find that the severity of the incident increases acquisition premium and this effect is exacerbated by acquiring firms' pre-existing reputational capital. At country level, incident acquirers in countries with stronger E&S standards and policies also experience higher premium. Further analysis shows that E&S incidents reduce shareholder value at the M&A announcement and increase time taken to M&A completion. Firms are less likely to acquire after experiencing an E&S incident, but it depends on the cost of delay. Finally, we show that reputational risk from negative E&S incidents on acquisitions is time variant, and it dissipates after the lapse of six months.

Keywords: Mergers and acquisitions, Corporate social irresponsibility, Reputational capital, Environmental scandal, Social Scandal