Evidence on the trade-off between corporate social responsibility and mergers and acquisitions investment

In this article, we investigate whether there is a trade-off between corporate social responsibility (CSR) and mergers and acquisitions (M&A) investments. Consistent with conflict resolution view of stakeholder theory, our results document a negative relationship between CSR scores and M&A activity. We further show that the tendency of CSR firms’ low engagements in M&A investmen ts is valid only for firms with no slack. We also find that firms choosing to trade off pay a lower bid premium to targets to create value for acquiring shareholders. These findings are robust to several alternative proxies and endogeneity tests. JEL Classification: G32, G34

WHY PAY MORE - WORLD EVIDENCE ON M&A BID PREMIUM DETERMINANTS

Corporate mergers and acquisitions represent one of the most dynamic fields in the world of the business finance. These remarkably complex transactions success may vary depending on the economic and institutional environments in which the transactions are performed. This paper investigates the information content of the bid premium determined in the M&A transactions and focuses on the identification of significant differences in its amount depending on: (1) the observed timeframe (width of the event window observed relative to the moment of the transaction announcement); (2) current equity market trends (3) institutional environments and the degree of the economic development of the countries in which the transaction participants operate; and (4) selected payment method and motive for entering the transaction in regard to space and time dimensions of bid premium. Examining the sample of 783 merger and acquisition transactions at the global economy level, the research explores the importance and range of time and space determinants of bid premiums in M&A transactions.Our results confirm that bid premium carries significant information and that is highly dependent on the observed timeframe, i.e. we find evidence of information “leakage” prior to transaction announcement and sluggish adaptation to expected value creation due to market characteristics, level of economic development of countries in which M&As are operated and specific transaction characteristics such as payment method and motive for participating in such transaction. The paper shows that the results can often differ depending on whether the analysis includes dominant trends in the most important capital markets.

Is non-executive directors’ pay or industry expertise related to takeover premiums, abnormal returns and offer price revisions?

We examine the association between various takeover outcomes and bidding firm non-executive directors’ (NEDs) compensation and expertise in the target firm industry. In our sample of 272 acquisitions by ASX listed firms between 2004 and 2011, we find that NEDs’ relative compensation and industry expertise have a negative association with the bid premium. We also find that NEDs’ relative compensation is positively associated with the bidding firm’s market reaction to the takeover announcement, and NEDs’ industry expertise is associated with a lower likelihood of an increase in the offer price, particularly for M&As viewed negatively by the market. These results are consistent with higher NEDs’ relative compensation and industry expertise leading to more effective board monitoring and advising.

How toeholds become footholds

We document empirical evidence that bidders tailor their takeover strategy when facing entrenched target managers. Key elements of a takeover strategy comprise the toehold purchase and the initial bid premium. We find that toeholds are acquired in cognizance of the principal outsider and target management block. Bidders’ free rider cost savings are measured by the product of the toehold and the initial bid premium. Several relationships are identified. Initial bid premiums for targets characterized by entrenchment are comparatively low and result in low free rider benefits to bidders. To avoid overpayment, bidders do not compensate entrenched managers for lost private benefits. Instead, in entrenchment scenarios toeholds are optimized with respect to the principal outsider as well as the target management block in order to create a foothold that neutralizes entrenchment. At the median toeholds match the spread between the principal outsider and the target management block in entrenchment scenarios, are about double the spread for shareholder-aligned targets and much smaller for owner-managed targets. Takeovers of owner-managed targets rely more on a higher offer price.