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Bang for Your (Green) Buck: The Effects of ESG Risk on US M&A Performance

by Richard Chen

Mergers & Acquisitions (M&A) is a fundamental corporate activity that has not received much attention from an environmental, social, and governance (ESG) perspective. In this paper, I analyze how buyer and target ESG risks affect US M&A performance in both the short and long run as measured by deal valuations and changes in buyer operating metrics, respectively. I utilize a sample of 341 transactions from 2007-2020 with a cumulative value over $3 trillion from Capital IQ where both the buyer and target have available ESG data provided by RepRisk. Utilizing OLS, my results suggest that higher ESG risk causes buyers to pay more and targets to receive less. In the long run, buyer ESG risk is an important determinant of performance. When examining the components of ESG, governance is the most consistently significant, followed by social, then environmental – though it becomes more significant in the long run. Additionally, all three components appear to have some non-linear impacts on M&A performance.

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Advisors: Professor Connel Fullenkamp, Professor Grace Kim | JEL Codes: G34, G14, M14


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