The effect of ESG on value creation from mergers and acquisitions. What changed during the COVID-19 pandemic?

Abstract

Purpose The purpose of this study is to investigate the relationship between environmental, social and governance (ESG) performance and shareholder wealth in the context of mergers and acquisitions (M&As) before and during the coronavirus (COVID-19) pandemic. Design/methodology/approach This paper uses a sample of 889 completed M&As announced by US firms between 1 January 2018 and 31 July 2020. Announcement abnormal returns are estimated using an event study methodology and the relation of ESG performance to shareholder value creation is tested with univariate and multivariate cross-sectional regressions. Findings This study provides evidence for a significant negative value effect of ESG performance for the shareholders of acquiring firms during the entire sample period. The negative effect appears to be stronger, as the onset of the COVID-19 crisis. This suggests that, during the pandemic-driven economic turmoil, the costs of sustainability activities outweigh any possible gains, providing evidence in support of the overinvestment hypothesis. Research limitations/implications The results of the study have important implications for firms, investors and policymakers. Firms should be more cautious with regard to extensive investments in ESG activities, particularly during economic turmoil. For shareholders, the results suggest that ESG engagement is not a resilience factor in an exogenous shock such as the COVID-19 pandemic. In terms of policymaking, the sustainability disclosure framework should remain voluntary allowing firms to report material ESG-related issues. The main limitation of the study is related to data availability regarding ESG performance. Originality/value To the best of the knowledge, this is the first study that investigates the effect of ESG performance on shareholder value in the market for corporate control before and during the COVID-19 pandemic.

Is ESG Relevant to Electricity Companies during Pandemics? A Case Study on European Firms during COVID-19

“…The sample used in our research was obtained from Thomson Reuters Refinitiv EIKON to identify the existing electric utilities, and traditional and renewable electricity companies in Europe, with a total of 378 companies. Thomson Reuters Refinitiv EIKON is used extensively in the literature to show the importance of ESG ratings related to financial and non-financial indicators, and it is one of a few providers of these scores [14,73]. We consider it to, generally, be in the right place, for a deep dive into the financial world, and it a leading platform used by finance practitioners and researchers.…”

“…We used different intervals for the event window, as suggested by the literature regarding the effect of ESGs on company returns [73], before, during, and after the event: (−5,0), (−3,0), (−2,2), (−1,1), (0,3) and (0,5). We also computed CAARs for (−10,0), (−5,0), (0,0), (0,5), and (0,10) for the WHO announcement, to show the evolution of abnormal returns during the pandemic with a longer time frame.…”

“…After estimating the firm CARs for the different windows around the event (WHO announcement), we used the following OLS regression to check the different effects of the event on the two ways of producing energy and the influence of ESG scores: CAR i(t1,t2) = a + β 1 Beta + β 2 TotalDebttoTotalEquity + β 3 CurrentRatio + β 4 lnmarketcap + β 5 lntotalrevenue + β 6 EnvironmentalPillarScore + β 7 SocialPillarScore + β 8 GovernancePillarScore + β 9 Traditional + ε i (6) where CAR i(t1,t2) is the cumulative abnormal return of the electricity company i, Environ-mentalPillarScore, SocialPillarScore, and GovernancePillarScore, are the main ESG pillars, with values ranging from 0 to 100, for low (0) and high (100) ESG scores. The firm-specific control variables used in the paper are total debt to total equity to control for the level of leverage of the company, beta to control for the risk of the company, the current ratio for the level of liquidity, the natural logarithm of the market capitalization to control for size, and natural logarithm of total revenue to control for operational profit [16,73]. The ESG scores and the firm specific variables were extracted for 2019, with a lag of one, to address potential endogeneity [73].…”

“…Demers, Hendrikse, Joos, and Lev [14] did not find significant effects of ESG factors on market returns during the pandemic. In addition, Tampakoudis, Noulas, Kiosses, and Drogalas [73] found negative effects of ESG factors on shareholder wealth, before and during the COVID-19 crisis, being stronger during the pandemic. They suggest that, during the crisis created by the pandemic, sustainable activity costs could outweigh potential gains, concluding that ESG involvement may not be a resilience factor in such a crisis context, since ESG activities are costly investments, against the literature stating the potential resilience of ESG factors in the context of uncertainty [14,72].…”

Performance Variability of State Owned Enterprises in Financial Sector and Financial Technology Companies During the Covid-19 Pandemic

“…Fenomena pandemi Covid-19 yang melanda berbagai negara telah memicu krisis ekonomi yang parah dan menimbulkan dampak yang belum pernah dirasakan sebelumnya di pasar keuangan secara global (Tampakoudis et al, 2021). Pada beberapa bulan terakhir, framing ekonomi global telah bergeser sebagai akibat dari pandemi Covid-19 (Vasenska et al, 2021) serta berdampak parah pada kegiatan ekonomi dunia (Liu et al, 2021).…”