Received: 1 February 2022 Revised: 8 October 2022 Accepted: 18 October 2022

DOI: 10.1002/bse.3293

RESEARCH ARTICLE

The effect of environmental, social and governance score on

operating performance after mergers and acquisitions

Emanuele Teti 1 | Lorenzo Spiga 2

1
Università di Pisa, Pisa, Italy
2
Lincoln International, Milan, Italy Abstract
This paper examines how the corporate social responsibility performance of the
Correspondence
Emanuele Teti, Università di Pisa, Via Cosimo acquirer firm, measured with the environmental, social and governance score, is
Ridolfi, 10-56124 Pisa, Italy. related to postmerger operating performance, by analysing 796 merger operations
Email: emanuele.teti@sdabocconi.it
that took place between 2011 and 2018. The analysis was carried out by first consid-
ering the full sample and then dividing the sample into three subsamples: acquirer
companies with an environmental, social and governance score below the median,
acquirer companies with a rating above the median and finally those companies con-
sidered to have a very high score (over 80). To support the results obtained from this
analysis, a machine learning technique was subsequently applied to the data. The
results obtained from the analysis demonstrated that acquiring companies with a high
environmental, social and governance rating manage to generate a significant
improvement in operating performance postdeal after the merger, whereas this is not
the case for companies with a low score or for companies with a score of above 80.
These results seem to demonstrate that although a high environmental, social and
governance score can have a positive impact on postmerger operating performance,
this only true up to a point. A possible explanation for this could be that the costs
involved in integrating and aligning the culture of the two merging companies
increase when there is the need to maintain a high score.

KEYWORDS
environmental policy; environmental, social and governance; mergers and acquisitions;
operating performance; stakeholder engagement; sustainable development

1 | I N T RO DU CT I O N The policies, practices and behaviours that companies adopt in

The financial markets recognize that a company's development model
must be capable not only of generating profit but also of meeting the
needs of the present generation without compromising that of future
generations. The concept of sustainability in business activity has
grown rapidly and is now at the heart of many international institu-
tions and enterprises (Hallin et al., 2021).
Abbreviations: CSR, Corporate Social Responsibility; ESG, Environmental, Social and
Governance.
favour of their stakeholders and the community within which they
operate are defined as corporate social responsibility (CSR).
It is not simple to define the concept of CSR, and more
importantly, it is not easy to measure exactly how ‘sustainable’ a
company is. In order to be able to collect useful data on these aspects,
the markets have recently turned to three aspects in particular—
environmental, social and governance (ESG) factors. These factors
allow companies to quantify to what extent they are applying
policies in these three key areas in the definition of their business
model and strategic decisions. Given the increasing attention of

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the markets towards ‘green’ investments, ESG factors are now one
of the key aspects that are taken into consideration when making
investment decisions, alongside traditional economic factors. In
fact, the majority of companies are now highly aware that these
factors must play a significant role in their business models and
strategic choices.
Mergers and acquisitions (M&A) are among the main strategic
choices that companies can make to promote growth and these
types of operations have become increasingly important in recent
years. Many studies have started to analyse whether CSR or ESG
performance can make a significant contribution to the financial
success of an M&A deal. Some studies have shown a negative
relationship between CSR and postmerger. Other studies have
been carried out where the researchers have been unable to pro-
vide clear evidence regarding the impact—whether positive or
negative—that CSR policies can have on postmerger operating
performance.
However, some studies find a positive relationship between CSR
strategy and a positive M&A performance, in line with stakeholder
theory. Evidence has shown that transactions involving companies
with high CSR achieve above normal returns subsequent to the
announcement, higher long-term stock performance, higher postmer-
ger gains in operating performance, shorter deal duration and lower
deal uncertainty.
Most of these studies focus on the relationship between the
target's CSR performance and value creation after the operation.
Only a few focus on the link between the bidder's CSR performance
and the creation of value after the completion of the M&A
transaction.
The aim of this paper is to provide a further contribution to the
stakeholder theory and to verify whether acquirer with high ESG
scores are able to create greater value from merger operations. This is
an aspect that at the moment has not been the subject of particular
in-depth analysis in the literature.
To carry out this analysis, in addition to using classical statistical
models, such as regressions, an innovative approach based on the
application of a machine learning model was used, which is not found
in the research analysed.
The analyses carried out revealed that companies with a high ESG
score registered a higher postmerger operating performance than
acquiring companies with a low ESG score.
However, this better performance is not found if the buyer's ESG
rating exceeds a certain threshold. One possible reason behind this
result can be found in the higher costs that may be sustained in order
to make the strategies aimed at ESG aspects of the acquirer and the
target compatible.
The paper is structured as follows: Section 2 introduces the exist-
ing academic literature on the relationship between ESG factors and
M&A transactions; Section 3 puts forward the hypotheses, while
Section 4 introduces data and methodology. Section 5 analyses the
results and limitations of the work. A final section concludes the
paper.
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TETI AND SPIGA
2 | LI T E RA T U R E RE V I E W
2.1 | The impact of CSR on corporate performance
In the recent years, many studies have focused on the analysis of the
impact of ESG factors on the valuation of companies (Cheng
et al., 2022). However, an unequivocal response has not yet been
found to confirm whether or not ESG factors have a positive or nega-
tive impact on the performance of a company (Lee et al., 2016). In this
context, there are two opposing theories: the stakeholder theory and
the shareholder theory.
The latter is based on the idea that the sole objective of managers
is to act in the interests of shareholders that is achieving maximum
profit. One main exponent of this theory is Friedman a Nobel Prize
Winner. According to Friedman (1970), managers that invest in CSR
spend money of the shareholders to meet the interest of other stake-
holders represent a conflict of interest because they are pursuing an
agenda contrary to what shareholders demand. So for this theory, the
implementation of CSR have a negative impact on the economic and
financial performance of the company and can destroy a company's
value.
Following along the lines of traditional neoclassical theory, some
authors, such as Palmer et al. (1995), have shown that investing in
social aspects involves additional costs that could be avoided, since
these costs should not be borne by companies but by other entities,
such as State authorities. Higher costs imposed on companies due to
industry regulations that aim achieve social benefits may lead instead
to lower economic results.
In contrast, the stakeholder theory, whose main exponent was
Edward Freeman (1984), states that companies should not act with
the aim of maximizing profit, but they should also create a strong rela-
tionship with other stakeholders involved in the life of the company
and they should take into consideration social and environmental
aspect of the business (Bhandari et al., 2022). According to this the-
ory, the company is seen as a nexus of explicit (e.g., contracts
between employee and employer) and implicit contracts (e.g., promise
of good customer service). The implicit contracts have a little legal
standing, and so they depend on the stakeholder expectation of possi-
bility of honour these commitments. Since firms that invest more in
CSR (hereafter, high CSR firms) tend to have a stronger reputation for
keeping their commitment associated with the implicit contracts,
stakeholders of these firms are likely to have stronger incentives to
contribute resources.
This also led to an alignment between the interest of the stake-
holders and the shareholders that contributes to a better long-term
profitability and efficacy (Deng et al., 2013; Lu et al., 2022).
Many authors have attempted to support the stakeholder theory.
Jensen (2001) believes that there is a close relationship between
value maximization and the stakeholder theory—in order to reach
the long-term maximum value of the firm it is necessary to take cor-
porate vision and strategy into consideration. A company cannot
create value without building good relationships with employees,

TETI AND SPIGA
customers, suppliers and the community within which the company
operates.
Godfrey et al. (2009), through the analysis of various legal and
regulatory actions taken against some companies, state that invest-
ments in ESG factors can represent a form of ‘insurance’ against
reputational risks. Furthermore, McWilliams et al. (2006) pointed out
that a positive reputation can itself be of economic value, given that
consumers attribute a higher value to the products of companies that
have a strong reputation for their sustainable policies.
Some studies support the thesis that good corporate social
performance (CSP) can have a positive impact on the financial perfor-
mance of companies in the medium to long term.
Waddock and Graves (1997) carried out a study to test the
relationship between financial and social performance. The CSP of
companies was calculated using the ratings produced by Kinder,
Lydenberg and Dominu (KLD), while the financial performance was
calculated using certain variables (return on assets, return on equity
and return on sales). The study showed a positive relationship
between the availability of resources to invest in social activities and
an improvement in CSP. In addition, a positive relationship was found
between social performance and future financial performance.
Awaysheh et al. (2020) analysed the relationship between CSR
and financial performance by comparing the companies analysed with
peers in the same industry, in order to identify best-in-class and
worst-in-class companies. The analysis showed that there were very
few transitions from worst-in-class to best-in-class, with the latter
recording higher operating performance and market valuations.
Adopting in the analysis an instrumental variables approach in order
to mitigate potential endogeneity concerns, the relationship between
operating performance and CSR breaks down, raising doubts about
the existence of a random relationship. However, the analysis con-
firmed that best-in-class companies achieve higher market valuations
than companies in the same sector.
The impact of good relationship between stakeholder has an
important role also in the M&A.
Until 2014, however, empirical studies had mainly focused on
assessing the impacts—and in particular the costs—associated with
CSR, on the financial performance of the companies. Very little
research had been carried out on the impact of CSR and, more specifi-
cally, ESG factors, in M&A transactions (Malik, 2015).
Most of the studies focused on assessing the impact of ESG fac-
tors on short-term performance, in particular on the development of
market values.
Aktas et al. (2011) studied the effect of CSR engagement on
M&A announcement returns of target firms. They identified a clear
connection between target CSR and M&A wealth creation. They
explained that abnormal returns for the purchaser (abnormal returns
around an announcement date measure the wealth creation for share-
holders) are positively associated with the target company's social and
environmental performance.
This result indicates that the more successful the target firm is in
terms of environmental and social performance, the higher the gains
can be for the shareholders that acquire the company. The study
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3167
reveals a positive relationship between stock market reactions to
M&A announcements (i.e., acquisition of targets with high CSR) and
the social and environmental performance level of the target com-
pany. This suggests that in the short term the acquirer benefits from
the target's CSR practices and experiences.
This conclusion was confirmed by Gomes and Marsat (2018) in
their evaluation of the impact of CSR performance on the probability
of being an M&A target. Their study showed that a company's CSR
scores are positively linked to the probability of becoming a target
and the premium includes expected synergies from the deal. More-
over, as also found in Aktas et al. (2011), deals that form the greatest
synergies between the companies occur with targets that have better
CSR performance.
Gomes (2019) examined the impact of CSR on the target choices
for M&A. Thus, he demonstrated a direct correlation between a firm's
CSR and its propensity to become an M&A target. These results were
also applicable for all CSR dimensions (environmental, social and gov-
ernance). In brief, Gomes was able to conclude that CSR is an impor-
tant consideration in M&A decisions and that CSR is positively related
to the likelihood of being the subject of an M&A offer.
Other authors have attempted to examine the impacts of ESG
factors on future performance in post M&A transactions. These types
of studies are highly complex since the future performance of compa-
nies can be affected by various aspects that are difficult to assess
individually.
During merger the contract between shareholders and stake-
holders are often renegotiated with the combined firm and so the rep-
utation of a firm of fulfilling implicit contract and maintaining long-
term relationship with relevant stakeholders is important in the
merger's success.
A study carried out by Cho et al. (2021). They investigated
whether a target firm's CSR performance could create value for its
shareholders. Their results indicated that a target company whose
CSR performance is stronger than that of the acquirer yields higher
premiums for target shareholders. In order to create value, the
acquirers pay a reasonable price for the target's CSR activities, while
the bidders expect to increase or maintain relations with all relevant
stakeholders (Tampakoudis & Anagnostopoulou, 2020). These results
are consistent with the stakeholder theory for maximizing stakeholder
value, considering that investing in CSR can create value in M&A
transactions.
One of the main studies was carried out by Deng et al. (2013).
The study showed that acquirers with high CSR value achieve higher
merger announcement returns, higher long-term stock returns and
higher postmerger operating performance than acquirers with low
CSR ratings. In addition, acquirers with a high level of CSR themselves
complete transactions in a shorter timeframe and have fewer failures
than low CSR acquirers. This study underlines how good social perfor-
mance plays an important role in merger transactions and supports
the thesis of maximizing stakeholder value as predicted by the stake-
holder theory.
Some authors found a strong deterioration in postoperation per-
formance (Clark & Ofek, 1994; Yeh & Hoshino, 2002). According to

3168
Straub (2007), one of the main reasons underlying these failures
tend to be cultural differences between the buyer and the target,
integration costs, external factors and errors in the negotiation
strategy.
One of the studies that tried to examine directly how a company's
stakeholder orientation influences acquirer performance was com-
piled by Bettinazzi and Zollo (2017). Their analyses suggest that orien-
tation towards employees, customers, suppliers and local communities
influence an acquiring firm's behaviour during the acquisition process
and long-term acquisition performance. Their findings indicate that an
increased focus of the acquirer on customers, suppliers and local com-
munities has, all else being equal, positive direct effects on acquisition
performance. However, the same cannot be said in the case of
employee orientation.
Considering the increasing attention towards sustainable invest-
ments capable of supporting the future growth of the planet and
avoiding negative environmental impacts, over the last few years,
some in-depth studies have been carried out on the impacts that the
choice of targets, defined as ‘green firms’, can have on M&A
transactions.
Vezér and Morrow (2017) found that ESG compatible deals out-
performed ESG incompatible deals by an average of 21% on a 5-year
cumulative return basis. They concluded that ESG compatibility can
have a positive effect on company performance.
Considering the increasing attention towards sustainable invest-
ments capable of supporting the future growth of the planet and
avoiding negative environmental impacts, over the last few years
some in-depth studies have been carried out on the impacts that the
choice of targets, defined as ‘green firms’, can have on M&A transac-
tions In other cases the role of M&A as a driver for better ESG perfor-
mances has been also studied (Barros et al., 2022).
Salvi et al. (2018) examined the postacquisition performance of a
bidder by analysing return on assets postacquisition. They found that
if the bidders decide to opt for a ‘green’ deal, they can improve their
financial performance when compared to other deals within the same
industry. The same conclusions were reached by Brakman et al.
(2006).
The impact of the target's ESG score on the acquirer's post M&A
performance was explored by Feng (2021). The result shows that
most acquirers suffer performance decline 1 year after the M&A
transactions, the reduction is greater for acquirers with low ESG rat-
ing. Although the finding of the study provides that acquiring a target
with a high ESG score can have a detrimental effect on a low ESG
acquirer in the short term (i.e., 1 year), the researcher believes that
‘such a situation may reverse in the long term when the acquirer
makes enough adjustments to finish the strategic and cultural
integration’.
3 | HYPOTHESIS
From an overview of the literature, it emerges that ESG factors are
becoming increasingly important in the context of the strategic
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TETI AND SPIGA
choices of companies. As seen in the first part of the paper, the signifi-
cance of ESG factors for the purposes of company value growth is the
subject of two opposing theories: the shareholder theory, which con-
siders ESG factors extraneous to the company's objectives and repre-
sents a cost that must be avoided, as it directly affects the results of
the companies, and the stakeholder theory, which considers ESG
engagement a strategic choice that can contribute to the growth of
value to the company in the medium/long term by improving relation-
ships with the various stakeholders.
This paper fits in this context, and in particular, the first hypothe-
sis that wants to investigate is whether the ESG score of the acquirer
has an impact on the postmerger operating performance of a com-
bined entity.
In order to evaluate the impact on posttransaction performance,
only merger operations were considered. Other M&A operations, such
as the acquisition of assets or acquisition of a minority stake, were
excluded because it would not have been possible to isolate the con-
tribution of these transactions in the calculation of operating perfor-
mance. Only in the case of a merger between two companies, the
bidder and the target, is it possible to calculate the impact of the oper-
ating performance on the combined company.
Relatively few studies have focused on the impact of acquirer's
ESG score on the operating performance postmerger. One of the
most important papers on this topic was written by Deng et al. (2013).
In their paper, they found that companies resulting from a merger
with an acquirer with low ESG performance experience a deteriora-
tion in postmerger operating performance, while mergers conducted
by acquirers with a high ESG score experience no significant change
in postmerger operating performance.
The second hypothesis that this paper wants to investigate is
whether a merger operation can create value also when the acquirer
has a very high ESG rating. The idea behind this hypothesis is that in
the case of operations involving acquirers with very high ESG ratings,
these companies might have to bear higher costs during the integra-
tion process with the target, hence reducing the value created by the
operation.
In the second part of the analysis, a different technique was used
to support the results obtained in the first part. More specifically, the
goal was to verify whether and to what extent the ESG factors may
have influenced the increase in operating performance.
In order to do this, the analysis investigated which financial
parameters had the greatest influence on the success of the transac-
tions using a machine learning technique.
4 | DA T A A N D M E T H O D O L O G Y
4.1 | Methodology
There is a great number of empirical research available that aims to
study changes in operating performance after a major corporate
event, such as an M&A operation, a buyout or a security offering. The
operating performance is based on accounting-based metrics, and it

TETI AND SPIGA
analyses the change of this measure after an operation compared to a
specific benchmark.
According to Barber and Lyon (1996), researchers must follow
three steps in order to design an event study: selection of a measure
of the operating performance, selection of a benchmark with which to
compare the performance and selection of an appropriate
statistical test.
In most research studies, the operating performance used is
EBITDA, defined as earnings before interest, taxes, depreciation and
amortization. This operating performance excludes interest payments
and so allows for a comparison of the performance prior to and after
a deal without the influence of the manner in which the transaction
was financed.
Using a raw measure does not allow for a comparison of the oper-
ating performance across firms, so one common approach is to deflate
the measure of performance creating a relative metric. In Healy et al.
(1990), the market value of asset of the company was used as a defla-
tor. The disadvantage of this measure and in general of any other mar-
ket measure is that it is forward-looking and so can also reflect the
possible effect of market expectations after the deal (Powell &
Stark, 2005). One possible solution to overcome this problem is to use
an adjusted measure excluding all the possible abnormal changes pre
operation. Theoretically, the abnormal change following the
announcement of an operation is given by the capitalized value of the
improvement after the operation. However, this adjusted measure is
problematic since it relies on the efficient market hypothesis and the
ability of analysts to predict postoperation performance (Jensen &
Ruback, 1983).
Another possible concern with the use of the market value of
asset as deflator is that it can cause a possible bias in the operating
performance ratio. There are several studies that highlight how the
market value of the acquiring firm declines some years after the oper-
ation, in particular during the following 3–5 years. This reduction of
the denominator can cause an increase in the postmerger operating
measure even if this increase in not caused by an actual improvement
in the operating performance. Consequently, in this paper, the book
value of assets was employed as a deflator.
The operating performance premerger is the total asset weighted
average of the EBITDA of the target and the acquirer, 1 year before
the merger, while the postmerger operating performance measures
are calculated 2 years after the operation. This time interval was cho-
sen to mitigate the possible impact on operating performance of other
variables, internal or external, not directly linked to the operating per-
formance of the companies. In fact, it is very difficult to isolate the
factors that may contribute to the success or failure of a transaction.
Moreover, it was considered that 2 years after the deal was a suffi-
cient time period to allow the integration of the target in the bidder
company.
Following the approach of Healy et al. (1990), to measure the
improvement of the performance after the operation, a regression
model was used. The difference in postmerger operating performance
between the firm involved in the operation and a ‘similar’ firm not
involved in the same year in any operation was regressed, on the
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3169
same difference before the operation. The intercept in such a regres-
sion is interpreted as an estimate of the abnormal improvement of the
operating performance that occurred after the operation. In fact, using
the difference preacquisition performance as a control variable the
intercept is the part that remains unexplained and consequently must
be attributed, by definition, to the acquisition itself.
In many studies, the change in the preoperating–postoperating
performance is analysed using as a benchmark an industry-average
measure. The problem with this method is that it can create some bias
in the results (Ghosh, 2001). This bias is caused by the fact that merg-
ing firms tend to outperform the industry average in the pre-event
year. This occurs mainly for two reasons: First, merger companies
tend to have a systematically different size than the industry average,
and second, usually firms decide to undertake M&A after a period of
superior performance. Using the propensity score matching, and more
generally a matching method, allows the risk of potential bias to be
reduced.
In this work, the ‘similar’ company was selected using the pro-
pensity score matching method (Heckman et al., 1998). In the applica-
tion of this method, to estimate the propensity score, the logit
regression was used and as covariates: ESG score, size (logarithm of
total assets), market/book value, leverage (total debt/total assets) and
an industry dummy (two-digit SIC code). The sample of companies
from which the ‘similar’ company was chosen was built as follows:
1. all companies that have an ESG score form Refinitiv as of
1 September 2021 were collected, resulting in an initial sample of
possible comparable of 5205 companies. This sample was used as
a starting point for each year of the time window analysed;
2. in each year, in order to carry out a temporal matching, the vari-
ables of the companies in the comparable sample were
recalculated;
3. it was then necessary to eliminate from the sample of each year
(i) companies that carried out M&A transactions in the reference
year and (ii) all the companies for which not all the information
needed to perform the analyses were available; and
4. the matching method is applied with respect to the value of the
covariates included in the model 1 year before the operation.
As a matching method, the nearest neighbour matching has
been used.
In the second part of the paper, a machine learning algorithm
called gradient boosting classifier has been employed in order to sup-
port the aforementioned analysis.
Machine learning is an innovative investigation tool compared to
the methodologies commonly used by scholars in the past that mainly
use regression models. The reason why the machine learning model
has been preferred is because it is able to discover important and dif-
ferent aspects of the data that classical statistical techniques cannot
uncover (Breiman, 2001). A good explanation of the advantages of
using a machine learning methods is provided by Brieman in his paper
‘Statistical Modelling: Two Cultures’: The goal of a model is not only
to provide good interpretability of the results but also to provide
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3170 TETI AND SPIGA

accurate information. In his paper, Breiman provides an example com- TABLE 1 Sample distribution by announcement year
paring a statistical method (logistic regression) with a machine learning Year #Transactions Percentage ESG score
model (random forest). His example shows how the machine learning
2018 135 17.0% 49.2
model is able to discover important aspects of the data that a standard
2017 119 14.9% 46.5
statistical method cannot uncover. In fact, according to Breiman
2016 120 15.1% 49.2
(2001), ‘high predictive accuracy is associated with more reliable
2015 93 11.7% 49.6
information’, and generally, machine learning models are able to pro-
2014 96 12.1% 48.0
vide better predictive accuracy than statistical methods.
The dataset used is the same as before and has been divided in 2013 59 7.4% 47.3

training data (80%) and test data (20%). In this analysis, the gradient
boosting is used for a classification problem. The variable of interest is
the ‘success’ (variable equal to 1) or ‘unsuccess’ (variable equal to 0)
of a merger operation. A ‘successful’ operation is defined as an opera-
tion where the change between the preoperating and postoperating
performance of the merger firm is higher than the one of the ‘similar’
companies identified with the propensity score matching in the previ-
ous analysis. The features included in the model are as follows:
• ROE, debt/asset and size (log of total asset) of both acquirer and
target;
• ESG score of the acquirer firm;
• cross-border dummy that has value 1 if it is a cross-border deal;
• industry dummy that takes value 1 if both the acquirer and the tar-
get are in the same industry;
• dummy variable to indicate if also the target has an ESG score
available; and
• size of the deal.
To perform the analysis, the model was applied in two steps: In
the first step, gradient boosting was used to quantify the relative
importance of the variables to predict the response variable; in the
second step, since the relative importance of the variables does not
give any information on the magnitude and direction of the influence
of the explanatory variable on the dependent variable, the partial
dependent plot was applied. This application allows the influence of
an explanatory variable on the dependent variable (ESG) to be ana-
lysed after marginalization with respect to the remaining variables.
4.2 | Data sample
2012 89 11.2% 47.9
2011 85 10.7% 44.5
Total 796 100.0% 47.78
As reported in Table 1, the number of transactions per years
ranges between 59 of 2013 and 135 of 2018. The average of the ESG
score of the acquirer company involved in the merger operation is
47.78 considering all the years included in the analysis.
Table 2 reported the geographical distribution of both the target
and the acquirer. The samples represent 38 countries, of which
United States account for the largest share with 50% of acquirer firms
and 58% of target firms. The distribution of industries is reported in
Table 3, where Financials, Energy & Power, Basic Materials and Tech-
nology are strongly represented in the sample with a percentage of
around 15% each.
4.3 | ESG factors
The ESG rating is an index that measures how well a company, secu-
rity or fund complies with ESG factors. These ratings differ substan-
tially from traditional ratings, which take into consideration only
economic and financial variables and measure the creditworthiness of
an issuer. In the last few years, the use of ESG ratings has become
increasingly common among investors who use them alongside tradi-
tional ratings in their investment decisions.
The three central factors in measuring the sustainability of an
investment, as mentioned above, are environmental, social and
governance.

This study selected a sample of completed merger transactions in the
global market that took place between 1 January 2011 and
31 December 2018. This time window was chosen to exclude impacts
from the 2007–2009 financial crisis.
Data on takeovers are collected from SDC Platinum Refinitiv
database.
The criteria applied for selecting the transactions are (1) acquirer
and target are publicly traded, (2) value of the deal greater than $1
million and (3) acquirer has an ESG score from Refinitiv. Transactions
with respect to which all the information needed to perform the ana-
lyses was not available were excluded. The transactions matching
these criteria are 796.
4.3.1 | Environmental
The environmental criteria examine how the company contributes to
tackling environmental challenges and includes potential risks that the
impact of their business activity poses to ecosystems. In evaluating
the criteria, it is important to consider not only the impact that busi-
ness activity has on the environment but also the risks faced by the
company in this area. This includes risks related to climate change and
how the goals of reducing CO2 emissions, energy efficiency and usage
of natural resources (e.g., water) are managed. Policies put in place by
companies to tackle air and water pollution and the potential waste of
natural resources and deforestation are key considerations.
 10990836, 2023, 6, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/bse.3293 by Indian Institute Of Management Ranch, Wiley Online Library on [15/03/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
TETI AND SPIGA 3171

TABLE 2 Sample distribution by country

Country #Acquirer Percentage #Target Percentage

United States 398 50.0% 468 58.8%
Australia 94 11.8% 60 7.5%
United Kingdom 59 7.4% 39 4.9%
Canada 51 6.4% 98 12.3%
Japan 42 5.3% 34 4.3%
South Africa 26 3.3% 6 0.8%
France 9 1.1% 6 0.8%
Brazil 9 1.1% 2 0.3%
Ireland 9 1.1% 1 0.1%
India 7 0.9% 6 0.8%
Israel 5 0.6% 9 1.1%
Netherlands 5 0.6% 8 1.0%
Italy 3 0.4% 2 0.3%
Sweden 2 0.3% 2 0.3%
Other 77 9.7% 55 6.9%
Total 796 100.0% 796 100.0%

TABLE 3 Sample distribution by

Sector #Acquirer Percentage #Target Percentage
industry
Energy & Power 86 10.8% 85 10.7%
Healthcare 110 13.8% 115 14.4%
Basic Materials 116 14.6% 112 14.1%
Consumer Cyclicals 86 10.8% 85 10.7%
Consumer Non-Cyclicals 42 5.3% 41 5.2%
Financials 117 14.7% 110 13.8%
Industrials 106 13.3% 102 12.8%
Technology 107 13.4% 118 14.8%
Real Estate 25 3.1% 26 3.3%
Educational Services 1 0.1% 2 0.3%
Total 796 100.0% 796 100.0%

4.3.2 | Social of directors, as well as remuneration policies linked to the achieve-

ment of sustainability goals. It takes into account policies and control
This metric relates to the policies companies follow regarding the procedures aimed at verifying the behaviour of directors, who are
working environment, labour relations and supervision of the supply required to conform with ethical and compliance principles.
chain. The analysis of social criteria includes the areas of gender diver-
sity, age, labour standards and safe working conditions. It also takes
into account the company's respect for human rights and social 5 | RE SU LT S
responsibility.
5.1 | Findings

4.3.3 | Governance
This aspect concerns the ethics and transparency of corporate gover-
nance in an enterprise and is a measure of management quality. It
includes the definition of policies aimed at ensuring the presence of
independent directors and diversity in the composition of the board
Before analysing the results of the regression analyses, it is necessary
to do a preliminary analysis to evaluate the quality of the matching
performed using the propensity score. Table 4 shows two-sample
t tests and the standardized bias used to measure the actual balance
of the covariates subsequent to the matching procedure. For all vari-
ables, the test statistic is less than 1.96; hence, the means of the two
 10990836, 2023, 6, Downloaded from https://onlinelibrary.wiley.com/doi/10.1002/bse.3293 by Indian Institute Of Management Ranch, Wiley Online Library on [15/03/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
3172 TETI AND SPIGA

TABLE 4 Propensity score matching

Merger firms Nonmerger firms (control group) Comparison

Mean SD Mean SD
Two-sample Standardized
Variable N = 796 N = 796 t-statistics difference in %
ESG score 47.94 21.32 47.50 21.18 0.42 2.10%
Total debt/total asset (%) 24.32 16.95 23.54 17.71 0.90 4.53%
Size (log of total asset) 16.64 2.37 16.77 2.98 0.96 4.82%
Market to book value 2.40 35.89 2.87 11.06 0.36 1.82%

FIGURE 1 QQ plot

samples are not statistically different. The analysis of the standardized
bias also shows that the covariates are balanced, and in fact, it always
shows values of below 5%. Although there is no theoretical threshold
of reference to establish the success or failure of the procedure, in
many studies, a value of around 5% for this statistic is considered suf-
ficient (Caliendo & Kopeinig, 2005).
In addition to the numerical analysis of the matching quality, a
graphical analysis was also carried out using the QQ plot that is a
graphical method for comparing two probability distributions by plot-
ting their quantiles against each other. QQ plots for a comparison to
be made between the quantile of the treated group with the one of
the untreated (control) groups. If all the points lie exactly on the 45
line, the two groups have the same distributions (Figure 1).
Thus, on the basis of both quantitative and graphical analysis, we
can conclude that the matching procedure balanced the covariates
included in the model between the treated and control group.
Table 5 shows the results of the four regression analyses carried
out. Panel A shows the results of the regression with reference to the
entire sample. What emerges from this is that the value of the inter-
cept is positive but not statistically significant, whereas the associa-
tion between the operating performance before and after the
operation turns out to be highly important given that the slope of the
regression is positive and statistically significant.
The results suggest that considering the total number of selected
transactions, no significant improvement in operating performance for
the acquirer was registered that was higher than that recorded by
‘similar’ companies that did not carry out M&A transactions.
The same regression analysis was repeated, dividing the sample
into two groups: companies with high ESG scores (above the median)
and low ESG scores (below the median). In Panel B, the results con-
cerning the subsample with a low ESG score are reported. The conclu-
sions obtained are the same as those obtained considering the whole
sample. In fact, the intercept, although negative, is not statistically sig-
nificant, while the slope of the regression is again positive and signifi-
cantly different from 0. The results obtained considering only the
subsample with a high ESG score are different. These results are
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TETI AND SPIGA 3173

TABLE 5 Regression analysis • market to book value of the acquirer

Dependent variable = • debt over asset ratio of the acquirer

difference in postmerger • deal size (dummy variable that has value 1 if the deal value is
operating performance higher than 100 million dollars)
between the combined
• cross-border (dummy variable with value 1 if the deal is cross-
Independent variable firm and the control firm
border)
Panel A: Full sample
• industry dummy (value 1 if the acquirer and the target operate in
Constant 0.008 (1.30)
the same sector)
Difference in premerger operating 0.733*** (23.4)
performance between the combined
Table 6 shows the results of the four regression analyses carried
firm and the control firm
out. The overall conclusion is confirmed: Only in the sample with high
Sample size 796
ESG score the intercept value is positive and statistically significant at
R2 .41
a 5% confidence level. However, in this case with an estimated aver-
Panel B: Low ESG score
age gain associated with the merger is about 14.0%.
Constant 0.001 ( 0.10)
To support the regression analysis, gradient boosting algorithm
Difference in premerger operating 0.692*** (15.7) was applied in order to do a more in-depth analysis of the interaction
performance between the combined
between some financial variables of the bidder and the target with
firm and the control firm
the postmerger operating performance. Initially, a dummy variable
Sample size 398
was calculated which takes value 1 in the presence of a ‘successful’
R2 .38
operation and value 0 in the case of ‘unsuccess’. A ‘successful’ opera-
Panel C: High ESG score
tion is an operation in which the variation between the preoperating
Constant 0.017** (2.35)
and postoperating performance of the merged firm is greater than
Difference in premerger operating 0.811*** (18.34) that of the ‘similar’ firm identified in the previous analysis through the
performance between the combined
propensity score matching. In the sample under analysis, 343 are
firm and the control firm
defined as unsuccessful operation (43.9%) and 453 ‘successful’
Sample size 398
(56.1%).
R2 .46
Second, the predictive performance of the model was analysed.
Panel D: ESG score over 80
The overall accuracy performance tested on a test set of 126 observa-
Constant 0.003 (0.17)
tions (20% of the entire sample) was 68%. In particular, it is able to
Difference in premerger operating 0.943*** (15.4) correctly predict the failure of the operation (variable equal to 0) in
performance between the combined
57% of the cases and the success (variable equal to 1) in 75% of the
firm and the control firm
cases. The analysis of the accuracy is important in order to have an
Sample size 65
indication on the significance of the results obtained.
R2 .78
Figure 2 represents the relative variable importance for the esti-
*Significance at the 10% critical level. mated model. The relative importance of the variables is calculated on
**Significance at the 5% critical level.
the basis of the relative influence of each variable in the model: For a
***Significance at the 1% critical level.
variable X, indicator is based on how much the overall squared error
of the entire model decreases as a result of a splitting decision based
reported in Panel C, and what emerges is that the merger generates a on that variable X. In other words, the importance of a variable
significant improvement in operating performance. In fact, the describes the extent to which a feature has a ‘meaningful’ impact on
intercept value is positive and statistically significant at a 5% the predicted outcome.
confidence level. The estimated average gain associated with the From this analysis, it can be seen that the size of the target is the
merger is about 1.7%. most important variable in the model, and the ESG score of the
Finally, to complete this first part of the analysis, the regression acquirer would also seem to play a significant role. The problem with
analysis was repeated for a subset of companies with an ESG score this initial analysis is that little can be said about the magnitude and
of above 80. In contrast to the previous analysis, in this case, there is direction of the impact of these variables on the dependent variable.
no improvement in postoperating performance related to the opera- For this reason, the partial dependence plot is also presented. This
tion, as the intercept is positive but not statistically significant. plot allows us to show the marginal effects that a variable included in
To control for some other factors that can have an impact on the the model has on the predicted outcome. When the function is in the
postmerger operating performance, the regressions presented above positive region, it means that for the corresponding values of the
are replicated with the introduction of some other covariates: independent variable, the positive class is more likely (in the case of
this paper this is the success of the operation) and vice versa for nega-
• size of the acquirer and the target (log of total assets) tive values.
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3174 TETI AND SPIGA

TABLE 6 Regression analysis TABLE 6 (Continued)

Dependent variable = Dependent variable =

difference in postmerger difference in postmerger
operating performance operating performance
between the combined between the combined
Independent variable firm and the control firm Independent variable firm and the control firm
Panel A: Full sample Panel D: ESG score over 80
Constant 0.007 ( 0.15) Constant 0.175 ( 0.85)
Difference in premerger operating 0.738*** (23.40) Difference in premerger operating 0.969*** (14.60)
performance between the performance between the
combined firm and the control firm combined firm and the control firm
Total debt/total asset (%) 0.000 (1.33) Total debt/total asset (%) 0.001 (0.85)
Size of acquirer (log of total asset) 0.002 ( 0.59) Size of acquirer (log of total asset) 0.002 ( 0.23)
Market to book value 0.000 ( 0.53) Market to book value 0.000 ( 0.52)
Size of target (log of total asset) 0.005 (1.59) Size of target (log of total asset) 0.007 (0.86)
Cross-border (dummy) 0.012 ( 0.92) Cross-border (dummy) 0.010 ( 0.31)
Deal size (dummy) 0.02 ( 1.18) Deal size (dummy) 0.094 (0.95)
Industry (dummy) 0.02 ( 1.69) Industry (dummy) 0.017 (0.51)
Sample size 796 Sample size 65
R2 .42 R2 .81
Panel B: Low ESG score *Significance at the 10% critical level.
Constant 0.11 ( 1.44) **Significance at the 5% critical level.
Difference in premerger operating 0.693*** (15.6) ***Significance at the 1% critical level.
performance between the
combined firm and the control
firm
Total debt/total asset (%) 0.001 (1.27)
Size of acquirer (log of total asset) 0.002 (0.36)
Market to book value 0.000 (0.07)
Size of target (log of total asset) 0.008 (1.39)
Cross-border (dummy) 0.004 (0.19)
Deal size (dummy) 0.044 ( 1.44)
Industry (dummy) 0.025 ( 1.25)
Sample size 398
R2 .40
Panel C: High ESG score
Constant 0.140** (2.23)
Difference in premerger operating 0.821*** (18.16)
performance between the
combined firm and the control
firm
Total debt/total asset (%) 0.000 (0.20) FIGURE 2 Relative variable importance
Size of acquirer (log of total asset) 0.009** ( 2.36)
Market to book value 0.000 ( 0.67)
From the analysis of Figure 3 emerges how the probability that
Size of target (log of total asset) 0.004 (1.25)
the operation leads to an improvement in postoperating performance
Cross-border (dummy) 0.031** ( 2.01)
increases as the ESG score increases up until a value of around 70.
Deal size (dummy) 0.017 ( 0.65)
For the company with an ESG score higher than threshold, the proba-
Industry (dummy) 0.010 ( 0.67)
bility of a ‘successful’ merger operating declines.
Sample size 398
The results obtained following the analyses carried out could be
R2 .48 influenced by various factors.

TETI AND SPIGA
FIGURE 3 Partial dependence plot
One of the aspects that may have had an impact on the results
derives from the way in which the sample of data used was defined.
More specifically, the sample was constructed considering only listed
companies that had an ESG rating and that had been involved in a
merger operation during the selected period. The choice to use only
listed companies is based on the assumption that the information pub-
lished by these companies can be considered more reliable than the
information that is released by an unlisted company. The reliability of
the data clearly has a significant impact for the purposes of this analy-
sis. Furthermore, due to limited number of studied deals, it is possible
that the selection is not independently and identically distributed and
this could cause some problems of spurious regression.
Significant criticalities have also been highlighted regarding the way
in which the rating companies define the scores attributed to the compa-
nies. In fact, there is insufficient disclosure to understand which method-
ology and metric is used by the rating agencies to calculate the individual
subcomponents of the index and the overall rating assigned to the issuers.
Another limitation of the analysis is that the relationship between
postmerger operating performance and the ESG score assigned to the
target is not investigated in depth.
6 | C O N CL U S I O N
As mentioned in the paper, the number of M&A transactions has
grown considerably over the years as they represent one of the main
tools used by companies for strategic growth. Given their importance,
numerous studies have been carried out to verify the actual positive
impact of these operations on the growth of company value.
However, the studies carried out have failed to provide an
unequivocal answer as to the ability of these transactions to lead to
an improvement in the performance of companies.
This can be attributed to several factors, including the difficulty
of isolating the effects of M&A from all other factors—both internal
and external—that may affect the value of companies.
In addition, the studies have measured the growth in value by tak-
ing into account different parameters, such as share performance or
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3175
economic variables, examined over different time periods ranging
from short to medium–long term.
Most analyses have focused on the impact on market valuations
in the short term, while fewer studies have considered the impact on
changes in operating performance after the completion of
transactions.
The measurement of operating performance is based on the anal-
ysis of changes in economic parameters. Different choices are made
by the researchers both in terms of proxy for the operating perfor-
mance (EBIT, EBITDA, net results …) and for the deflator (market
value of assets, book value of assets, sales …).
These economic factors are difficult to compare given the differ-
ent accounting frameworks that could be applied and the possibility
for them to be manipulated.
Over the last few years, the analysis of the effects of M&A trans-
actions has expanded to include sustainability aspects and, in particu-
lar, ESG factors. These factors have increasingly gained the attention
of stakeholders and therefore represent a highly important factor in
companies' strategies.
However, even in this area, the conclusions are ambiguous. On
the basis of stakeholder theory, developed by Freeman, the attention
paid by companies to the needs of all those who have a relationship
with the company can bring economic benefits in the future both in
terms of risk reduction and in improving their reputation towards the
various stakeholders who are connected with the company
(employees, customers, suppliers and lenders).
Freeman's thesis contrasts with that of the shareholder theory, of
which Friedman was the greatest supporter, which considers these
aspects extraneous to the objective that must be pursued by manage-
ment, which is that of maximizing profits. Hence, costs related to envi-
ronmental and social factors are considered as extraneous costs to
the company's activity that affect its profit and must be avoided.
Over the years, several studies have been carried out to assess
the impacts on market valuations or on the operational performance
of companies of the pursuit of CSR objectives and in particular of
aspects related to ESG factors. Also in this case, no consensus was
reached based on the results obtained to allow for a positive or
negative assessment of impact on company performance.
The analyses have covered various aspects, focusing in the major-
ity of cases on the impacts on the target or on the merged entity.
Very few studies have analysed how the results of merger
transactions can be influenced by the presence of an acquirer that
integrates CSR aspects into its strategy.
In this paper, examining companies with a high ESG scores, better
performance was seen than in operations involving acquiring compa-
nies with a low ESG scores. This result seems to support the theory
that ESG factors are relevant in the value creation of companies.
A more detailed analysis of companies with a high ESG rating
found that there is no improvement in the operating performance
connected to the merger when the ESG rating of the acquirer was
above 80 (maximum value is 100). This result seems to confirm that in
mergers the need to maintain a high ESG score after the merger can
lead to higher integration costs.

3176
As mentioned by X. Feng, a bidder should carefully consider dif-
ferences in ESG rating when evaluating a potential target firm. The
study finds that acquiring a target with a high ESG score can have a
detrimental effect on a low ESG acquirer in the short term (i.e., 1 year)
although he believes that it is reasonable to think that such a situation
may be reversed in the long term when the acquirer makes enough
adjustments to put in place the strategic and cultural integration.
These considerations can also be considered valid in the hypothesis
that it is the acquirer that has a high ESG rating, as also in this case,
adaptation costs to improve the low ESG rating of the target may be
necessary in order to incorporate them in the business strategies of
the new postmerger entity.
For acquiring companies with low ESG ratings, the results showed
that being involved in a merger operation does not improve the post-
merger operating performance.
In order to verify whether and to what extent ESG factors may
have contributed to postmerger operating performance, a machine
learning methodology was used. The results obtained showed that, in
addition to the factors related the size of the target company, ESG
factors are also relevant to predict postmerger operating performance.
A more detailed examination of this factor seems to confirm the
results obtained with the regression method, where the improvement
in the postmerger operating performance is evident for acquirers
with high ESG scores, but above a certain level—in the case under
examination 70 out of a maximum score of 100—the benefits
decrease. This evidence seems to further support the thesis that in
the medium term (in the case at hand 2 years after the completion of
the transaction) strategic and cultural costs must be sustained by the
merging entity.
The results obtained from the analyses carried out highlight how
ESG aspects take on relevance in strategic operations carried out by
companies and in decisions regarding whether to carry out operations
of a strategic nature such as merger operations.
However, it should be underlined that the limited disclosure of
ESG data and the difficulty in quantifying ESG performance repre-
sents a serious challenge for academia, possibly reducing the reliability
of empirical research. It is not easy to compare the information pro-
vided by the various ESG rating agencies. Greater disclosure on how
ratings are constructed could increase the reliability and comprehensi-
bility of these indicators.
Furthermore, the analysis focused on the overall ESG rating
and did not consider the importance of the individual subcomponents,
such as ESG factors. Further analyses could be carried out to
verify which of the various subcomponents can have a greater
impact on value growth and on the strategic choices made by
companies.
In view of the increasing attention being paid to sustainability,
more in-depth analysis will be necessary to verify whether and how
these aspects are actually included in the strategic choices, how to
verify the impact that these choices have on the future performance
of the companies and how the companies themselves can contribute
to improving the context in which they operate.
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TETI AND SPIGA
CONFLIC T OF INT ER E ST
All co-authors have seen and agree with the contents of the manu-
script, and there is no financial interest or any other kind to report.
We certify that the submission is original work and is not under
review at any other publication.
OR CID
Emanuele Teti https://orcid.org/0000-0002-1849-0445
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of environmental, social and governance score on operating
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