Socially responsible firms and mergers and acquisitions performance: Australian evidence

Pacific-Basin Finance Journal 57 (2019) 101193

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Socially responsible firms and mergers and acquisitions performance: Australian evidence

T

Chandrasekhar Krishnamurtia, , Syed Shamsb, Domenico Pensierob, Eswaran Velayuthamb ⁎

a b

University of South Australia, Australia University of Southern Queensland, Australia

ABSTRACT

This paper extends our knowledge of acquisition decisions by examining whether a firm's corporate social responsibility (CSR) activities influence Merger and Acquisition (M&A) deal characteristics, target choice and acquisition performance. Our empirical results reveal several new insights. First, we find that targets with CSR activities are more likely to be acquired by CSR-oriented bidder firms. Second, we also examine the deal characteristics of CSR firms and find that they choose deal features such as cash payment, domestic targets, and single bids. Third, we show that socially responsible firms are more likely to pay a lower bid premium when they pay for acquisitions. Finally, we find that the announcement period abnormal return is positive and significant when CSR-oriented bidding firms announce an acquisition decision in the market. Overall, we show that CSR firms make acquisition decisions which align shareholders with other stakeholders of the firm. Our results are robust to a number of alternative proxies and sensitivity tests.

1. Introduction Corporate Social Responsibility (CSR) has become more mainstream in recent years (Deng et al., 2013), and many firms detail their CSR activities in their annual reports and company websites. This is in spite of the fact that CSR is not compulsory and the empirical evidence on the impact of CSR on shareholder wealth is mixed (McWilliams et al., 1999; Teoh et al., 1999; McWilliams and Siegel, 2000; Margolis and Walsh, 2001; Lev et al., 2010; and Jiao, 2010). Deng et al. (2013) study the relationship between CSR and a firm's stock return performance at merger announcements. They find that high CSR firms experience more positive announcement period returns. These results are consistent with the view that shareholders view mergers and acquisition (M&A) activity of CSRoriented firms more positively than firms that engage less in socially responsible activities. They suggest that their results are consistent with the stakeholder value maximization view. This theory proposes that firms engage in CSR to better engage with stakeholders other than shareholders. The improved alignment is likely to result in greater long-term profitability and efficiency (Jensen, 2001; Jawahar and McLaughlin, 2001; Freeman et al., 2004). However, the work of Deng et al. (2013) is silent about whether CSR-oriented firms' M&A decisions differ from other firms. Further, we do not know whether the deal characteristics of CSR-oriented firms are different from other firms and whether these drive the M&A performance of CSR-oriented firms. Therefore, we extend this literature in three directions by investigating the association between CSR practice and M&A decisions. First, we examine the choice of target firm with respect to its CSR-orientation. Prior work posits that cultural alignment is a significant factor that affects the post-merger integration of a deal. In a recent survey, 48% of executives indicated that they would forego a deal if there was cultural misalignment between the acquirer and the target (Graham

Corresponding author. E-mail addresses: [email protected] (C. Krishnamurti), [email protected] (S. Shams), [email protected] (D. Pensiero), [email protected] (E. Velayutham). ⁎

https://doi.org/10.1016/j.pacfin.2019.101193 Received 30 November 2018; Received in revised form 17 July 2019; Accepted 13 August 2019 Available online 16 August 2019 0927-538X/ © 2019 Elsevier B.V. All rights reserved.

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et al., 2015). Cultural fit is one of the factors mentioned by senior C-Suite executives in justifying on-going M&A transactions.1 A firm's CSR behavior is increasingly recognized as an important aspect of its corporate culture. CSR practices of firms reflect the shared beliefs and values within a firm and thus its corporate culture. Bereskin et al. (2018) posit that the similarity in CSR between an acquirer and its target increases the likelihood of a merger between them taking place. Further, the likelihood of successful integration between an acquirer and its target increases with greater similarity in their CSR behavior. They provide empirical validation of the impact of CSR similarity on the likelihood of merger and greater ease of post-merger integration. Second, we examine the deal characteristics such as choice of cash versus stock payment, the use of multiple bids, and the bid premium paid for acquisition of CSRoriented firms. Finally, we examine the impact of CSR-orientation on acquisition performance for several windows ranging from 3 days to 60 days. We posit the view that CSR-oriented acquirers choose targets with CSR-orientation due to the lower social and environmental risks and better cultural fit. Further, empirical evidence is supportive of the view that high CSR involvement is associated with increases in investment efficiency (Benlemlih and Bitar, 2018). Overall, we find evidence consistent with the view that high CSR firms experience greater alignment of shareholders with other stakeholders. Thus, we find that a CSR-oriented firm will choose deal characteristics that are consistent with shareholder value maximization and therefore avoid features of M&A deals that are deemed to be value-destroying. This line of thought implies that CSR-oriented firms will avoid stock as a payment method, prefer domestic to foreign targets and tend not to use multiple bids. Finally, we also posit the view that CSR-oriented firms will pay lower bid premiums since higher bid premiums are associated with high agency costs and overconfident managers. In this paper, using an Australian sample of 776 firms, we study the impact of CSR on a firm's M&A decisions. Our choice of the Australian market is due to the similarity with the U.S. market in terms of corporate governance and also the fact that this issue is under-researched in the Australian market. We examine four critical issues. First, we examine whether CSR-oriented firms prefer to acquire target firms based on their CSR-orientation. We find that the CSR score of the bidding firm is positively associated with the chance of choosing a target firm with CSR practice. This result suggests that acquiring firms with a strong CSR performance choose targets based on their CSR-orientation. Second, we examine whether the CSR-orientation of the acquiring firm is associated with the types of merger deals completed by the firm. We find that high CSR firms tend to use cash only offers and avoid multiple bids. Since cash offers reflect lower agency costs and are less risky than stock deals and multiple bids are mostly agency driven acquisition decisions, our finding suggests that CSR-orientation reduces the managerial tendency of engaging in value-destroying deals. Third, we examine the impact of CSR-orientation of the acquiring firm on acquisition performance using announcement period abnormal returns. We find that CSR-oriented bidding firms earn significant positive abnormal returns during the three-day announcement period event window. This finding suggests that CSR is associated with better stakeholder alignment and this information is recognized by the stock market. Finally, we also show that there is a statistically significant negative relationship between bid premium and CSR score of the acquiring firm suggesting that high CSR firms pay lower bid premiums, ceteris paribus. Our paper offers a number of significant contributions in extending the mergers and acquisitions and CSR literature. First, we provide evidence suggesting that firm-level CSR score is associated with better mergers and acquisitions decisions, which is consistent with the view that CSR firms have better alignment of various stakeholders of the firm. Second, we provide new evidence showing that CSR-oriented bidding firms are more likely to acquire a target with strong CSR practices implying that the social orientation culture of the firm is a significant determinant of the choice of a target. Third, our evidence confirms that Australian CSR-oriented bidding firms are less acquisitive and are therefore expected not to destroy shareholder wealth as in the case of multiple bids. This study has important implications for shareholders and policy makers. The institution of ethical culture at the firm level is seen to improve the long-run performance of the firm, which is consistent with the ASX's ‘Corporate Governance Principles and Recommendations’ (2014). Overall, our contribution to the literature is that CSR practice has a beneficial impact on the value of the firm by mitigating value-destroying M&A deals. We suggest that the better alignment of stakeholders is the reason for this finding. The rest of the paper is organized as follows. In Section 2, we preview the literature. In Section 3, we describe the data, sample, measurement of key variables and multivariate analysis models. Our empirical results are contained in Section 4. We offer our concluding comments in Section 5. 2. Literature review and hypotheses CSR-orientation has been viewed through different lenses. One view is that CSR practice creates a conflict between different types of stakeholders. Some researchers view CSR activities from an agency point of view positing that managers make overcommitment to CSR activities in order to gain private benefits. Managers have incentives to invest excessively in CSR activities to enhance their reputation as good citizens and seek positive attention at the expense of shareholders (Surroca and Tribó, 2008; Barnea and Rubin, 2010). Bouslah et al. (2013) contend that managers gain stakeholders' support through CSR activities to prevent replacement through takeover threats. Surroca and Tribó (2008) show empirical evidence suggesting that a firm's socially responsible activities are consistent with mangers' entrenchment strategy. If shareholders view CSR practice as an unnecessary drain on a firm's resources, then they would consider this as value destroying. Another view of CSR is through the lens of stakeholder alignment. If CSR activity is consistent with the objectives of different types of stakeholders, then it would be deemed to be beneficial. Prior research documents that CSR practice is associated with better financial performance (Fatemi et al., 2015; Gao and Zhang, 2015; Becchetti et al., 2013; Huseynov and Klamm, 2012; Kim and 1

See Bereskin et al. (2018), footnote 2. 2

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Statman, 2012; Jiao, 2010; Margolis and Walsh, 2001; Galema et al., 2008; Roman et al., 1999). Further CSR practice has been shown to impart other benefits to the firm. There is empirical evidence suggesting that CSR practice is risk-reducing (Kim et al., 2014; Bouslah et al., 2013; Aktas et al., 2011; Lee and Faff, 2009). Firms with better environmental performance have a lower cost of capital (Dhaliwal et al., 2011). Fisman et al. (2006) posits that philanthropic activities of a firm signal product quality and caring for customers. Guiso et al. (2015) find empirical evidence consistent with the view that firm performance is stronger when employees perceive top managers as trustworthy and ethical. In the context of M&A, there is a paucity of work on the alignment versus conflict view of CSR. We begin our empirical analysis by examining whether the CSR practice of the target drives acquisition choice. There are several reasons why an acquirer would choose a target with CSR practice. First, acquirers may prefer targets with the ability to cope with environmental and social risks. Extant empirical evidence supports the claim that firms with strong CSR practices engage less in earnings management and are less likely to hide bad news from investors. Thus Kim et al. (2014) find evidence supporting the view that CSR-oriented firms are associated with lower stock price crash risk. Second, Aktas et al. (2011) posit that acquirers could learn from target's CSR practices and experiences. They find evidence consistent with the view that the stock market rewards acquirers who acquire socially responsible targets. Third, increased social and environmental performance potentially increases a firm's efficiency, employee and customer satisfaction, generate new opportunities and signal market quality (Fombrun and Shanley, 1990). Benlemlih and Bitar (2018) provide empirical evidence consistent with the view that high CSR involvement is associated with increases in investment efficiency. Further, Waddock and Graves (1997) suggest that managerial and strategic skills that bring about high social performance also lead to good financial performance. Finally, recent work by Bereskin et al. (2018) highlights the role played by cultural fit in determining successful postmerger integration. Since CSR is an organizational culture marker, acquirers with CSR practice are more likely to choose a target with similar CSR-orientation. Based on this line of argument, we posit that CSR-oriented acquirers will choose CSR-oriented targets in order to minimize social and environmental risks. Overall, it appears that CSR practice seems to be beneficial to the firm. We posit that acquiring firms with strong CSR score should be more aware of the benefits of CSR activities compared to other firms. Based on these arguments, we suggest that acquiring firms should prefer targets with CSR practice, other things being equal. We, therefore, propose the following hypothesis: H1. CSR-oriented bidders are more likely to acquire a target with higher CSR-orientation. Next, we examine the influence of CSR on key M&A decisions. Following Deng et al. (2013), we posit the stakeholder value maximization view, which suggests that CSR practice focusses on stakeholders as a whole. Further, Ferrell et al. (2016) posit the CSR good governance view which argues that socially responsible firms tend to adhere to value-maximizing corporate governance practices. Further, their empirical evidence supports the view that CSR should be associated with fewer agency concerns and better managerial decisions. Thus CSR firms should consider deal features that align well with stakeholder interests when negotiating M&A deals. Based on prior literature, we examine key deal characteristics such as (i) choice of payment methods (cash versus stock payment); (ii) target location (domestic versus foreign acquisitions); and (iii) serial bidding (single versus multiple bidders). We first consider the choice of specific payment method used by a CSR-oriented bidding firm. We suggest that high CSR bidding firms are more likely to be stakeholder-oriented and not driven by private benefits consistent with agency costs view of M&A. A CSRoriented bidder is more likely to use cash as payment method as opposed to stock payment for several reasons. First, Koerniadi et al. (2015) argue that firms with overvalued stock prices are more prone to undertake riskier acquisitions and such overvaluation has shown to influence post-merger acquiring firms' returns (e.g., Dong et al., 2006; Shleifer and Vishny, 2003). As CSR-oriented firms prefer less risk, they may avoid stock-financed acquisitions. Second, Travlos (1987) also suggests that mergers financed by cash tend to reduce agency costs. Finally, Karampatsas et al. (2014) show that firms with higher credit rating are more likely to use cash while financing a takeover. Since Attig et al. (2013) show that firms are more likely to achieve higher credit rating due to better social performance, we posit that high CSR firms tend to use cash compared to stock as payment method. H2(a). CSR-oriented bidders are more likely to use cash as a payment method than stock payment method. Second, we examine the target location aspect of M&A decision of CSR firms. We posit that high CSR firms are more likely to acquire domestic targets compared to foreign targets for a number of reasons. First, Uysal et al. (2008) find that acquiring firms prefer local firms to geographically distant firms due to the information advantage of local firms. Therefore, from a cultural fit perspective, CSR-oriented bidder firms are more likely to acquire a domestic over foreign target. Second, Kim et al. (2014) suggest that CSR firms tend to prefer less risk. As foreign acquisitions are more complex and riskier in nature and consistent with the view that high CSR firms avoid risky foreign ventures, we posit that they prefer to acquire a domestic target.2,3 Third, bidding firms are more likely to face differences in national cultures, management styles, the possibility of lay-offs and language barriers in foreign acquisitions resulting in an increase in the likelihood of foreign acquisition failure (Nadolska and Barkema, 2007; Johanson and Vahlne, 1977). Due to CSR firms' lower preference for risk-taking and due to their averseness to lay-offs, we posit that they are likely to prefer domestic to foreign acquisitions. H2(b). CSR-oriented bidders are more likely to acquire domestic targets over foreign targets. 2

Koerniadi et al. (2015) suggest several reasons regarding why foreign acquisitions may have higher risk compared to domestic acquisitions. A classic example is explained by Hastings (1999) in his paper that Lincoln Electric nearly went bankrupt because of the false assumption that its success at home would be replicated when acquiring abroad. 3

3

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Finally, we examine the CSR-oriented bidders' motive for single bidder over multiple acquisitions based on the following arguments. Antoniou et al. (2007) attribute the deteriorating performance of later bids of serial bidders to the hubris/overconfidence hypothesis outlined by Roll (1986). Further, Billett and Qian (2008) suggest that CEOs tend to become overconfident due to their positive experience and therefore, higher order deals tend to be value destroying. Tang et al. (2015) show evidence consistent with the view that overconfident CEOs are less inclined to CSR activity. This finding implies that CSR-oriented firms are less likely to have overconfident managers and therefore less likely to become serial acquirers. We, therefore, propose that high CSR firms have a lower propensity of using multiple bids. H2(c). CSR-oriented bidders are more likely to engage in single bid than multiple bid. We also investigate whether there is an association between CSR-orientation of the bidding firms and the size of the bid premium paid to target firms. Under the agency cost hypothesis, managers will pursue CSR activities with the motive of gaining private benefits at the expense of shareholders. Such managers, motivated by private benefits accruing to them from their corporate decisions, are likely to rationally overbid while acquiring other firms. Loderer and Martin (1990) argue that acquirers experience greater loses when acquiring large targets because they are more likely to overpay. This is explained by overconfident managers who tend to overestimate their ability to obtain acquisition benefits and thus tend to overpay (Hayward and Hambrick, 1997; Malmendier and Tate, 2008; Roll, 1986). Top executives often pay huge premia for large firms since they often bestow particularly high private benefits (Grinstein and Hribar, 2004; Harford and Li, 2007; Loderer and Martin, 1990; Morck et al., 1990). John et al. (2011) find that overconfident CEOs tend to pay a higher premium for acquisitions than their non-overconfident counterparts. Firms managed by ethical CEOs are less likely to make overpayment to target firms. The underlying reason for this expectation is that ethically oriented managers are less likely to possess the traits of overconfidence, hubris or narcissism. So, when CSR score is high due to the ethical attitude of CEOs, these firm are likely to pay lower bid premiums in M&A deals. Empirical evidence suggesting that mergers of CSR-oriented firms create value for the acquiring firm shareholders (Deng et al., 2013; Aktas et al., 2011) suggest that they must be paying lower bid premiums, ceteris paribus. These findings lend credence to our belief that CSR activities of a firm are likely to be negatively related to overpayment in mergers and acquisitions. However, this issue has not been empirically examined. We, therefore, hypothesize the following: H3. CSR-oriented bidders are more likely to pay lower bid premiums, ceteris paribus. 3. Sample characteristics, definitions of CSR variables and the data 3.1. Sample selection We collect the data for this study from a number of resources. Initially, we obtain 2101 Australian M&A announcements for the period 2000 to 2016 from Bloomberg database. We include all completed acquisitions of public listed companies on the Australian Securities Exchange. We dropped 454 firm-year observations due to unavailability of accounting and financial data and 871 firms that did not have CSR scores and corporate governance data resulting in a final sample of 776 firms. Corporate social responsibility data are collected from the ASSET4 of Thomson Reuters database. Accounting data are collected from the Worldscope of Thomson Reuters database. Financial data are collected from DataStream. Table 1 reports the details of our sample selection and exclusion. 3.2. Definition of variables 3.2.1. Measures of corporate social responsibility score In this study, we collect environmental, social and corporate governance (ESG) scores of ASSET4 database of Thomson Reuters to construct corporate social responsibility score (CSR). ASSET4 is a Switzerland-based company, that specializes in socially responsible investment analysis and collects firm-level ESG data using 900 evaluation points through a number of sources, including stock exchange filings, annual reports, sustainability reports, non-governmental organizations' websites and various news sources. A number of prior studies use ASSET4 ESG database to construct a composite measure for CSR. (Cheng et al., 2014; Cheung, 2016; Eccles et al., 2014; Hawn and Ioannou, 2016; Jackson et al., 2017; Rathert, 2016; Servaes and Tamayo, 2013; Shaukat et al., 2016). Following previous studies, we use equal weights for each of the components of ESG items. The coverage is potentially skewed towards large-sized firms as ASSET4 covers major firms. Since this is the most comprehensive dataset which is available to us, we use this in our research. Table 1 Sample selection. Sample selections and exclusions

No.

Initial completed Australian merger and acquisition-2000-2016 Financial data not available Financial data available for the sample firms CSR and corporate governance data not available Final sample

2101 (454) 1647 (871) 776

4

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3.2.2. Measures of abnormal returns We calculate the abnormal return for the three-day period around the announcement of completed acquisitions of Australian public listed firms as follows:

ARi,t = Ri,t

[

i,t

+

i

(1)

(Rm,t)]

where, ARi,t is the abnormal return for M&A firm i on day t, Ri,t is the return for M&A firm i on day t, Rm,t is the return on the market index on day t and αi and βi are the firm-specific parameters generated by the following market model:

Ri,t =

i

+

i

(Rm,t) +

(2)

i,t

where, Ri,t is observed return for stock I on day t, αi is constant for company i, βi is the beta of security i, Rm,t is observed returns on the market index on day t, and εi,t is residual error term. We use Australian all ordinary share index as the market index. The estimation period is 260 days prior to the announcement day to 61 days before the announcement day (−260 to −61). We exclude 60 days immediately prior to the announcement of M&A from the estimation period, as is common in prior M&A studies (Shams and Gunasekarage, 2016). Cumulative abnormal return (ABR) and Cumulative market-adjusted abnormal return (MBR) are also computed. The details of computation of these measures are provided in Appendix 1. 3.2.3. Measures of bid premium Following Humphery-Jenner and Powell (2011) and Officer (2007), we calculate the bid premium as the total deal value of target firm divided by the market capitalization of the target firm 30-days prior to the M&A announcement date. As our sample includes private targets as well, we estimate the proxy premium for private targets using the average year and industry bid premium calculated for public targets. 3.3. Descriptive statistics A summary of the descriptive statistics of the variables used in the study is shown in Table 2. The mean (median) CSR score measured using ASSET4 for acquired firms was 0.50 (0.44) whereas the corresponding score for target firms was 0.48 (0.44) indicating a strong similarity between CSR-orientation of the target and acquiring firms. Not surprisingly, we find that the cumulative abnormal return (ABR) from the day before the announcement to the day after the announcement date of the merger and acquisition (M&A) was 0.01. The mean net operating cash flow divided by total assets (OCF) was 0.08. The mean bid premium was −0.25, suggesting that the average target firm does not command a premium over prior market capitalization. When examining the financial indicators, the average size of the acquired firm's market capitalization (in logs) ranged from 5.64 in the 5th percentile to 10.47 in the 95th percentile with an overall mean of 8.07 and median of 8.22. The average Tobin's Q was 1.33, which, combined with a median of 1.08, indicates a positive skewness. The mean debt ratio of 25% indicates a relatively “heathy” financial position for the companies that comprised the final sample. The average board size of the acquiring firm was 7.72 (median of 8.00). The proportion of independent directors on the board for the acquiring firms averaged 60% ranging from 10% in the 5th percentile to 89% in the 95th percentile. This supports the view that acquiring firms tend to have good corporate governance pertaining to board structure and composition. Table 2 Descriptive statistics.

ACQCSR TARCSR TARCSRDMY ABR BID SIZ TOB LEV OCF CAH BZE DUA IND CAO REL URA SIN DOM

Obs.

Mean

Median

Max.

Min.

Std. dev.

5 percentiles

95 percentiles

776 64 776 745 149 776 776 776 776 776 776 776 776 776 776 776 776 776

0.50 0.48 0.08 0.01 −0.25 8.07 1.33 0.25 0.08 0.07 7.72 0.11 0.60 0.67 0.06 0.34 0.38 0.47

0.44 0.44 0.00 0.00 −0.72 8.22 1.08 0.25 0.08 0.04 8.00 0.00 0.67 1.00 0.01 0.00 0.00 0.00

0.96 0.93 1.00 0.18 0.97 11.92 8.85 0.69 0.33 0.84 18.00 1.00 0.95 1.00 1.35 1.00 1.00 1.00

0.08 0.11 0.00 −0.12 −1.00 3.81 0.07 0.00 −0.29 0.00 3.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.24 0.24 0.28 0.04 0.83 1.42 1.21 0.17 0.08 0.11 2.01 0.31 0.25 0.47 0.16 0.47 0.49 0.50

0.17 0.13 0.00 −0.06 −1.00 5.64 0.30 0.00 −0.01 0.01 5.00 0.00 0.10 0.00 0.00 0.00 0.00 0.00

0.90 0.86 1.00 0.09 0.97 10.47 3.08 0.55 0.21 0.25 11.00 1.00 0.89 1.00 0.29 1.00 1.00 1.00

This table reports the mean, medium, maximum, minimum standard deviation, 5 percentiles and 95 percentiles of the sample. 5

6

ACQCSR TARCSRDMY ABR BID SIZ TOB LEV OCF CAH BZE DUA IND CAO REL URA SIN DOM

1 0.09b −0.08b 0.14 0.57a −0.08b 0.06c 0.32a −0.17a 0.49a −0.05 0.49a 0.02 −0.15a 0.04 −0.01 0.01

1

1 −0.09b −0.52b −0.03 0.00 0.08b −0.04 0.03 −0.01 0.12a 0.06c 0.05 −0.03 0.07b 0.01 0.02

2

1 0.19b −0.18a 0.03 −0.09b −0.05 0.07c −0.080b −0.03 −0.11a −0.01 0.03 −0.05 0.05 −0.02

3

1 0.20b −0.01 −0.00 0.13 −0.11 0.18b −0.09 0.16c 0.04 0.29a −0.02 −0.01 −0.00

4

1 −0.03 0.25a 0.30a −0.27a 0.59a −0.03 0.27a 0.02 −0.25a 0.02 −0.28a −0.07c

5

1 −0.14a 0.28a 0.33a −0.13a 0.06c −0.07c 0.01 −0.09b 0.03 0.09b −0.08b

6

1 0.02 −0.14a 0.18a 0.04 −0.13a 0.03 −0.01 0.18a −0.17a −0.04

7

1 −0.01 0.15a 0.02 0.17a 0.04 −0.10a 0.05 −0.01 −0.06

8

1 −0.23a 0.06 −0.05 0.04 −0.01 0.13a 0.04 0.01

9

1 −0.02 0.07c −0.02 −0.14a 0.06c −0.10a −0.06c

10

1 −0.11a 0.06c −0.01 0.09a −0.03 0.02

11

1 −0.01 −0.17a 0.03 −0.03 −0.01

12

1 0.06 −0.01 0.08b 0.28a

13

1 −0.02 0.11a 0.06

14

1 −0.06 −0.05

15

1 0.15a

16

1

17

This table presents the Pearson correlation coefficients between the dependent and independents variables. ACQCSR is acquiring firm Corporate Social Responsibility score measured using ASSET4 which include environmental, social and corporate governance scores. TARSCRDMY is a dummy variable with the value of one if the target firm has CSR in the year, otherwise zero. ABR is the three-day abnormal price movement from the day before the announcement to the day after the announcement date of the merger and acquisition employing the market model. BID is the total deal value of a firm divided by 30-day before the M&A announcement date the market capitalization of the target firm. SIZ is the natural logarithm of acquiring firm's market capitalization. TOB is the market value total assets to book value of total assets. LEV is Total debt divided by total assets. CFL is the net operating cash flow divided by total assets. BZE is the natural logarithm of acquiring firm's number of directors on the board. CAH is cash scaled by total assets. DUA is a dummy variable with the value of one if CEO and the chairman of the board are the same person, otherwise zero. IND is the proportion of independent directors on the board. CAO is a dummy variable with the value of one if deals are financed with cash only as the payment method, otherwise zero. STO is a dummy variable with the value of one if deals are financed with stock only as the payment method, otherwise zero. REL is the total deal value divided by acquiring firm's market capitalization of 30 days before the announcement date URA is a dummy variable with the value of one if the acquisition is a diversifying acquisition, otherwise zero. DOM is a dummy variable with the value of one if target firms are located in fdomestic, otherwise zero. SIN is a dummy variable with the value of one if a bidder has acquired less than five targets in a year, otherwise zero. a Correlation is significant at the 1% level. b Correlation is significant at the 5% level. c Correlation is significant at the 10% level.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Table 3 Correlation matrix.

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3.3.1. Correlation matrix In Table 3, we report the correlations between the variables used in the study. The acquiring firms' CSR is positively correlated and highly significant with the bid premium (0.14), the size of acquiring firm's market capitalization (0.57) and the operating net cash flow (0.32). In addition, the acquiring firm's CSR is significantly positively correlated with the acquiring firm's board size (0.49) and the proportion of independent directors on the board (0.49) lending support to the proposition that good governance is positively associated with CSR. We note a significant negative correlation between CSR and cash holdings (−0.17) but a positive and significant relationship with net operating cash flow divided by total assets (0.32). While there is a negative correlation between Tobin's Q and CSR, the magnitude of this relationship is very low (−0.08). Most other correlations are similarly low and do not indicate any serious problems of multicollinearity. 3.4. Multivariate analysis We estimate several multivariate regressions based on target and bidder CSR. First, we estimate whether bidder's acquisition decision is influenced by target firm's CSR-orientation. We estimate the following probit regression to investigate the bidding firm's acquisition choice:

TARCSRDMYi, t =

0

+

1 (ACQCSRi, t )

+

i Controlsi, t

+

i Yeari, t

+

i Industryi, t

+

(3)

i, t

where the dependent variable (TARCSRDMY) is an indicator variable, which takes the value of 1 if a sample target firm has CSR practice in a given fiscal year, otherwise zero. We interpret TARCSRDMY as the decision by an acquiring firm to choose a target with CSR practice. We capture CSR-orientation of the bidding firms using the CSR score as a proxy for bidder's CSR practice (ACQCSR) along with a number of explanatory variables for firm and governance characteristics which are potential determinants of firms' preference for target CSR-orientation. These variables are defined in Appendix 1. To investigate our second research question (i.e., the impact of CSR-orientation of the bidding firms on acquisition choices), we estimate the following Logistics model:

ACQCHOICEi . t =

0

+

1 (ACQCSRi, t )

+

i Controlsi, t

+

i Yeari, t

+

i Industryi, t

+

(4)

i, t

where, in separate regressions, the dependent variable ACQCHOICEi, t represents dichotomous or binary outcome variable which takes the value 1 when a bidder: (i) uses cash as the method of payment, and zero otherwise (ii) acquires a domestic target, and zero otherwise, and (iii) acquires a single target in a fiscal year and zero otherwise. The explanatory variable includes CSR-orientation of the bidding firms which is the key variable of interest in the model. Specifically, across our three hypotheses H2a – H2c, the coefficient on this variable is predicted to be positive i.e. β1 > 0. A number of bidder characteristics such as leverage, cash holdings, firm size, and Tobin's Q are used as control variables. We also control for year and industry effects in order to account for the influences stemming from year-specific and industry-specific factors. To test the value implications of the acquisition announcements, we estimate the following regression model:

ACQPERFORMANCEi . t =

0

+

1 (ACQCSRi, t )

+

i Controlsi, t

+

i Yeari, t

+

i Industryi, t

+

i, t

(5)

where, in separate regressions, ACQPERFORMANCEi. t is represents (i) cumulative abnormal return earned by acquirers during a three-day announcement period (ABRi, (t−1 to t+1)), (ii) acquisition bid premium (BID). We calculate the bid premium using the total deal value paid by the bidding firm divided by the market capitalization of the target firm 30-days before the merger and acquisition announcement date. The first measure captures the short run market performance of acquisition announcements and the second measure captures the acquisition valuation efficiency. We use the bidder's CSR practice (ACQCSR) as the key independent variable controlling for a number of firm characteristics, board characteristics and mergers and acquisitions variables in our model. Finally, we investigate the endogeneity concern of our main models by employing Heckman Two-stage Sample Selection Model and 2-stage Least Square regression models to control for self- selection bias of our estimation and to address the reverse causality issues. 4. Empirical results 4.1. Target CSR-orientation and bidder acquisition choice In this section, we start our discussion by reporting results on bidder's propensity to acquire targets with corporate social responsibility practice. Table 4 presents the probit regression models to investigate the research question whether the acquisition decision of the bidding firm is determined by target firms' CSR-orientation. The dependent variable is a dummy variable for the target firm with CSR practice (TARCSRDMY). We use bidders actual CSR score as the main variable of interest in the probit regression models. We estimate models after controlling for year and industry fixed effects and report standard errors adjusted for heteroscedasticity and clustered at the firm level. Column 1 of Table 4 shows that CSR-oriented bidders are more likely to acquire a target with CSR practice as the ACQCSR is positively and significantly associated with target firm CSR-orientation (TARCSRDMY) at the 1% level. The findings remain unchanged even when we control for several governance variables in our baseline probit model as reported in Column 2 of Table 4. Our analysis shows that the coefficient of ACQCSR is significantly positive. The result shows that bidding firms with high CSR score are 7

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Table 4 CSR-oriented bidding firms and acquisition of target firms. Model

Constant ACQCSR SIZ TOB LEV OCF CAH BZE

Full sample 1

2

DV = TARCSRDMY

DV = TARCSRDMY

−2.0970 (−3.35)⁎⁎⁎ 1.2757 (2.84)⁎⁎⁎ −0.1721 (−2.05)⁎⁎ 0.0916 (1.92)⁎ 1.4049 (3.27)⁎⁎⁎ −2.0326 (−2.19)⁎⁎ 0.0387 (0.08)

−2.1361 (−3.01)⁎⁎⁎ 1.4979 (2.79)⁎⁎⁎ −0.1736 (−1.98)⁎⁎ 0.0927 (1.84)⁎ 1.3670 (2.89)⁎⁎⁎ −2.1316 (−2.18)⁎⁎ −0.0842 (−0.18) −0.0202 (−0.38) 0.6324 (3.17)⁎⁎⁎ −0.0111 (−0.02) Yes Yes 0.1603 149.88 0.0000 776

DUA IND Industry fixed effect Year fixed effect Pseudo R2 Wald chi2 Prob > chi2 N

Yes Yes 0.1390 115.27 0.0000 776

This table presents the results of probit regressions. In all regression models, the dependent variable is TARCSRDMY. TARCSRDMY is a dummy variable with the value of one if the target firm has CSR in the year, otherwise zero. ACQCSR is actual Corporate Social Responsibility score measured using ASSET4, which include environmental, social and corporate governance scores. The p-values based on robust standard errors clustered at the firm level. The z-values are in the parentheses. All controls variables are defined in Appendix 1. ⁎, ⁎⁎, ⁎⁎⁎ are significant at 10%, 5% and 1% respectively.

more likely to acquire a target with CSR-orientation, which is consistent with our hypothesis H1 that posits that socially oriented bidding firms are more likely to acquire a target firm with CSR-orientation. Turning to other firm characteristics, we find that large companies tend to have a significant aversion to acquire targets with CSR practice. Additionally, companies with high leverage favor targets with CSR practice. This finding is interesting as it indicates that highly leveraged bidders are more careful in target firm selection due to external monitoring by lending institutions. Among the other firm-level control variables, cash holdings is insignificant in both models. Tobin's Q is weakly significant in both models. With respect to board characteristics, we find that the presence of CEO duality increases support for targets with CSR-orientation as the dummy variable if CEO and chairperson of the board are the same person (DUA) is positive and significant at 1% level in Column 2. Our overall results show highly significant Wald Chi-square statistics for all models (P values 0.0000). Regarding economic significance, on average, a one standard deviation increase in ACQCSR (0.24) is associated with an increase in acquisition of CSR-oriented target by 35.82% (derived as Exp (1.2757 × 0.24) – 1 based on Column 1 of Table 4. The first term is the coefficient of the ACQCSR and the second term is the standard deviation of ACQCSR (Table 2). We find similar economic significance evidence based on Column 2 of Table 4. The economic significance of the estimates based in Column (2) is that a one standard deviation (0.24 from Table 2) increase in ACQCSR increases the propensity to acquire a target with CSR practices by 43.26%. 4.2. Robustness tests 4.2.1. Two-stage instrumental regression Our baseline results showing the positive association between CSR-oriented bidder and propensity to acquire a target with CSRoriented bidder could be driven by endogeneity due to reverse causality. For example, there could be acquirer-specific factors, which increase the tendency to acquire a CSR-oriented target, driving the relation. We use instrumental variables regression approach to address the endogeneity, which could potentially result from reverse causality, and report the results in Table 5. We use industry average CSR score for each year following Cheng et al., 2014 and Di Giuli and Kostovetsky, 2014 who find that the industry has an influential impact on firm-level CSR score. In addition to that, we use state average CSR score for each year 8

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Table 5 Two-stage instrumental regressions. Model

Constant CSR_IND CSR_STATE Instrumented CSR SIZ

1

2

First stage

Second stage

OLS

Probit

DV = ACQCSR

DV = TARCSRDMY

−0.6560 (−15.10)⁎⁎⁎ 0.4514 (10.35)⁎⁎⁎ 0.3368 (5.59)⁎⁎⁎

−1.2089 (−1.77)⁎

0.0517 (9.80)⁎⁎⁎ −0.0118 (−2.78)⁎⁎⁎ 0.0247 (0.68) 0.1931 (2.70)⁎⁎⁎ 0.0073 (0.15) 0.0228 (6.57)⁎⁎⁎ 0.2518 (9.29)⁎⁎⁎ −0.0222 (−1.34) Yes Yes 0.6692 71.95 0.0000 776 313.317 0.0000 261.96 0.639 0.4240

TOB LEV OCF CAH BZE DUA IND Industry fixed effect Year fixed effect R-squared/Pseudo R2 F-statistics/Wald chi2 Probability N Under-identification test (Anderson canon. corr. LM statistic) p-value Weak identification test (Cragg-Donald Wald F statistic) Sargan statistic (overidentification test of all instruments): p-Value

2.5139 (2.33)⁎⁎⁎ −0.2508 (−2.76)⁎⁎⁎ 0.1164 (1.93)⁎ 1.2286 (2.63)⁎⁎⁎ −2.5123 (−2.37)⁎⁎ −0.0926 (−0.15) −0.0349 (−0.61) 0.6294 (3.15)⁎⁎⁎ −0.3358 (−0.62) Yes Yes 0.1425 66.98 0.0000 776

This table shows the endogeneity issue of CSR two-stage residual inclusion method. Model (1) presents the first-stage regression results in which CSR is regressed on the other control variables. Models (2) show the second-stage probit regression results, respectively. The p-values based on robust standard errors clustered at the firm level. The t/z-values are in the parentheses. All controls variables are defined in Appendix 1. ⁎, ⁎⁎, ⁎⁎⁎ are significant at 10%, 5% and 1% respectively. First stage: ACQCSR = β0 + β1CSR_IND + β2CSR_STATE + β3SIZ + β4TOB + β5LEV + β6OCF + β7CAH + + β8∑Industries + β9∑Years + ε. Second stage: TARCSRDMY = β0 + β1CSR_Predicted + β2SIZ + β3TOB + β4LEV + β5OCF + β6CAH + β7BZE + β8DUA + β9IND + β10∑Industries + β11∑Years + ε.

following Deng et al. (2013), Hasan and Habib (2019) and Rubin (2008). We find the state where each firm is headquartered from Morningstar DatAnalysis database. Industry and state level CSR score can impact firm-level CSR score but are expected to have no direct impact on the acquisition of target with CSR score. In the first-stage, regression results reported in Column (1) of Table 5 indicates that the coefficients on CSR_IND and CSR_STATE (Industry and State Mean of CSR Score) are positive and statistically significant, indicating that the instruments increase the firm-level CSR score. In the second stage models, we control for the predicted value derived from the first stage as instrumented CSR and find that the coefficient of instrumented CSR is still positive and significant at 5% level in Column 2 after controlling for potential endogeneity. Thus, our main finding that CSR-oriented bidders are more likely to acquire a target with CSR practice proves to be robust to controls for endogeneity concerns. To test the validity of our models, we perform several tests. The under-identification test of LM statistics reveals that excluded instruments are relevant because of the Anderson canon. corr. LM statistic is significant at 1% level. The weak instrument test results show that the excluded instruments are correlated with endogenous regressor, since the Cragg-Donald Wald F statistics (261.96) is greater than the Stock-Yogo (2005) critical value of 19.693 at 10% level. The results from Sargan's over-identification test of all instruments test (p-value =.639) do not reject the null hypothesis, suggesting that the instruments are uncorrelated with the error 9

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Table 6 Heckman two-stage sample selection model. Dependent variable

Constant ACQCSR SIZ

Selection model

Main model

DV = ACQCSRDMY

DV = TARCSRDMY

−4.8439 (−9.14)⁎⁎⁎

−0.9570 (−0.70) 1.5521 (2.87)⁎⁎⁎ −0.2761 (−1.96)⁎⁎ 0.0984 (1.92)⁎ 1.3244 (2.81)⁎⁎⁎ −2.2011 (−2.15)⁎⁎ −0.1439 (−0.30) −0.0203 (−0.38) 0.6265 (3.18)⁎⁎⁎ −0.0322 (−0.07) −0.4095 (−1.00) Yes Yes 0.1616 148.94 776

BZE

0.5948 (9.49)⁎⁎⁎ −0.0111 (−0.25) 0.2409 (0.44) 0.5095 (0.71) 0.5623 (1.04) –

DUA

–

IND

–

INVMILLS

–

Industry year effect Industry fixed effect Pseudo R2 Wald Chi2 N

Yes Yes 0.3673 198.54 1647

TOB LEV OCF CAH

This table presents the results of the Heckman two-stage sample selection model. The dependent variables for selection model and main model are ACQCSRDMY and TARCSRDMY respectively. The p-values based on robust standard errors clustered at the firm level. The z-values are in the parentheses. All controls variables are defined in Appendix 1. ⁎, ⁎⁎, ⁎⁎⁎ are significant at 10%, 5% and 1% respectively. Selection model: ACQCSRDMY = β0 + β1SIZ + β2TOB + β3LEV + β4OCF + β5CAH + + β6∑Industries + β7∑Years + ε. Main model: TARCSRDMY = β0 + β1ACQCSR + β2SIZ + β3TOB + β4LEV + β5OCF + β6CAH + β7BZE + β8DUA + β9IND + β10∑Industries + β11∑Years + ε.

term and are correctly excluded from the second stage regression, supporting the validity of the instruments used for the 2SLS regression. Overall, our endogeneity controlled tests corroborate our primary findings. 4.2.2. Sample selection bias Table 6 presents the results of the Heckman (1979) two-stage sample selection model to control for self-selection bias. Bidders that engage heavily in CSR activities are more likely to acquire a target with CSR-orientation. Thus far, our tests only included firms with CSR activities. Given that our target sample includes both CSR and non-CSR firms, it is quite likely that there are some acquirers without CSR. We control for potential self-selection biases by using a two-stage model. In the first-stage regression, we estimate a probit regression where our dependent variable is ACQCSRDMY which is a dummy variable with the value of one if the acquiring firm has CSR score in the year, otherwise zero. The selection model uses SIZ, TOB, LEV, OCF, CAH, year and industry effects to estimate the inverse Mills ratio.4 We use 1647 M&A announcements in the first stage, including all the bidding firms with or without CSR scores that make acquisition announcements for publicly listed targets with necessary accounting and firm-level data. In the second stage, the dependent variable is the target CSR dummy (TARCSRDMY) which is a dummy variable with the value of one if the target firm has CSR score in the year, otherwise zero and controls for the inverse Mills ratio (INVMILLS) obtained from the first stage. The inverse Mills ratio (INVMILLS) captures the effect of the observable and unobservable determinants of bidders' decision of acquisition. The results of the two-stage self-selection model estimations confirm the tendency of CSR-oriented bidders' acquisition decision (ACQCSRDMY) to acquire a target with CSR-orientation (TARCSRDMY). The results show that the selection parameter INVMILLS is positive but insignificant. The insignificance of INVMILLS indicates that self-selection is not driving the results.

4

The model is presented below Table 6. 10

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Table 7 CSR-oriented bidding firms and acquisition choice. Model

1

2

3

Dependent variable

DV=Cash-only acquisitions

DV = Domestic acquisitions

DV=Single acquisitions

Constant

−0.0092 (−0.01) 1.0259 (1.98)⁎⁎ −0.0743 (−0.80) 0.0188 (0.23) 0.4331 (0.71) 2.4697 (2.16)⁎⁎ 0.8766 (1.09) −0.0505 (−0.93) 0.4848 (1.71)⁎ −0.4135 (−0.99) Yes Yes 0.0598 55.45 0.0004 776

0.7515 (1.21) 1.1367 (2.21)⁎⁎ −0.1376 (−1.58) −0.1086 (−1.43) 0.3249 (0.60 0.4294 0.35) 0.4706 (0.59) −0.0925 (−1.63) 0.1294 (0.50) −0.3452 (−0.83) Yes Yes 0.0565 55.22 0.0005 776

3.5976 (5.08)⁎⁎⁎ 2.2626 (3.92)⁎⁎⁎ −0.7039 (−6.95)⁎⁎⁎ 0.2009 (2.32)⁎⁎ −0.4031 (−0.68) 0.4775 (0.38) −1.6139 (−1.97)⁎⁎ 0.0530 (0.89) −0.1902 (−0.76) −0.1489 (−0.35) Yes Yes 0.1460 134.13 0.0000 776

ACQCSR SIZ TOB LEV OCF CAH BZE DUA IND Industry fixed effect Year fixed effect Pseudo R2 Wald chi2 Prob > chi2 N

This table presents the results of logistic regression. In this regression models the dependent variables are CAO, URA, DOM and SIN. ACQCSR is actual Corporate Social Responsibility score measured using ASSET4 which include environmental, social and corporate governance scores. All controls variables are defined in Appendix 1. The p-values based on robust standard errors clustered at the firm level. The t-values are in the parentheses. All controls variables are defined in Appendix 1. ⁎, ⁎⁎, ⁎⁎⁎ are significant at 10%, 5% and 1% respectively.

4.3. Bidder CSR-orientation and acquisition choice We further examine the impact of CSR-orientation of the bidding firms on acquisitions decisions and performance. First, we investigate whether CSR-orientation of bidding firms affect deal features such as payment method, target location, and serial bidding. Second, we examine whether CSR-oriented bidders experience improved performance in line with the alignment by prior literature (Deng et al., 2013). 4.3.1. Bidder CSR-orientation and acquisition choice We examine whether CSR-oriented bidders are more likely to be stakeholder-oriented and avoid making deals which increase the risk and have high agency costs. We investigate whether high CSR firms make M&A deals consistent with stakeholder-orientation by estimating several Logistics regression models. We report the results in Table 7 with standard errors controlling for year and industry fixed effects. Several interesting points emerge from our analysis. First, we find that high CSR firms are more likely to use cash only as the payment method when making acquisitions. This is consistent with hypothesis H2 (a) which states that CSR-oriented bidders are more likely to use cash as a payment method rather than stock as a medium of exchange. Second, we find that high CSR firms are more likely to acquire domestic targets than foreign targets when they make acquisitions decision (Column 2). This finding is consistent with the view that the acquisition of foreign targets is usually riskier due to differences in accounting systems, political issues or greater information asymmetries (Fuller and Glatzer, 2003). Our findings support hypothesis H2 (b) which posits that CSRoriented bidders are more likely to acquire domestic firms in preference to foreign targets. Third, we report that high CSR firms tend to make single acquisitions than multiple acquisitions in a given year (Column 3). This finding corroborates the earlier findings which show that multiple acquisitions may be influenced by managerial motives, such as empire building and prestige, rather than creating value for shareholders (Mahoney, 1979; Agarwal, 1981; Kostiuk, 1990). We find support for hypothesis H2 (c) which states that CSRoriented bidders are more likely to engage in single bids in preference to multiple bids. Overall, we find that CSR firms are more likely to be associated with cash deals, domestic rather than foreign firms and single acquisitions rather than multiple acquisitions. The Pseudo R squared ranged from 5.65% to 14.60% across our models with all models possessing significant Wald Chi-square statistics (Probability ranging from 0.0000 to 0.0005). The above findings provide empirical support for the view that M&A decisions of stakeholder friendly firms align well with shareholders' wealth maximization objectives. These results are also consistent with Deng et al. (2013) findings that CSR firms make value-creating mergers and acquisitions. 11

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Table 8 CSR-oriented bidding firms and acquisition performance. Dependent variable

DV = ABR

Model

1

2

3

4

Constant

0.0654 (3.51)⁎⁎⁎ 0.0187 (1.81)⁎ −0.0077 (−3.27)⁎⁎⁎ −0.0016 (−0.57) −0.0157 (−1.30) 0.0126 (0.28) 0.0126 (0.65)

0.0744 (4.08)⁎⁎⁎ 0.0267 (2.47)⁎⁎ −0.0076 (−2.97)⁎⁎⁎ −0.0017 (−0.62) −0.0209 (−1.66)⁎ 0.0146 (0.33) 0.0002 (0.19) −0.0218 (−1.99)⁎⁎ −0.0054 (−0.84) 0.0146 (0.74) −0.0011 (−0.12) −0.0012 (−0.13) −0.0011 (−0.09) 0.0029 (0.75) 0.0005 (0.12) Yes Yes 0.0320 1.55 0.0399 745

−2.5303 (−3.40)⁎⁎⁎ −0.9272 (−1.82)⁎ 0.2951 (4.17)⁎⁎⁎ −0.0243 (−0.46) −0.7959 (−1.75)⁎ 0.2428 (0.26) −0.2340 (−0.50)

−2.5491 (−3.53)⁎⁎⁎ −1.0091 (−1.87)⁎ 0.2457 (2.54)⁎⁎ −0.0174 (−0.31) −0.7179 (−1.56) −0.0445 (−0.05) −0.2559 (−0.53) 0.0467 (0.80) 0.1873 (0.60) −0.1218 (−0.55) 0.4317 (1.70)⁎ 0.4437 (1.23) 2.3917 (4.17)⁎⁎⁎ 0.0822 (0.52) −0.1288 (−0.75) Yes Yes 0.0721 2.96 0.0000 149

ACQCSR SIZ TOB LEV OCF CAH BZE DUA IND CAO REL URA DOM SIN Industry fixed effect Year fixed effect Adj. R-squared F-statistics Probability N

−0.0017 (−0.19) −0.0021 (−0.23) 0.0019 (0.15) −0.0029 (−0.73) −0.0002 (−0.06) Yes Yes 0.0281 1.29 0.1618 745

DV=Bid premium

0.4064 (1.64) 0.4491 (1.27) 2.4387 (4.31)⁎⁎⁎ 0.0882 (0.57) −0.1651 (−1.00) Yes Yes 0.0884 3.16 0.0000 149

This table presents the results of ordinary least-squares (OLS) regression. In models 1 and 2, the dependent variable is ABR. ABR is the three-day abnormal price movement from the day before the announcement to the day after the announcement date of the merger and acquisition employing the market model. The dependent variable in models 3 and 4 is Bid Premium. Bid premium is defined as the ratio of the total deal value to the target firm market capitalization 30-days before the M&A announcement date minus one. ACQCSR is acquiring firm actual Corporate Social Responsibility score measured using ASSET4 which include environmental, social and corporate governance scores. All variables are defined in Appendix 1. The pvalues based on robust standard errors clustered at the firm level. The t-values are in the parentheses. All controls variables are defined in Appendix 1. ⁎, ⁎⁎, ⁎⁎⁎ are significant at 10%, 5% and 1% respectively.

4.4. Bidder CSR-orientation and acquisition performance In this section, we examine the bidder CSR-orientation and acquisition performance using two proxies: (i) three-day announcement period abnormal returns and (ii) acquisition bid premium. We argue from an alignment perspective that if a firm manager engages in CSR activities from a moral perspective and their social commitments towards various stakeholders, the market should perceive that such acquisitions will create value for the shareholders. Further, we investigate whether CSR firms pay lower bid premium when they make acquisitions decisions. Socially oriented firms are more likely to engage better with stakeholders and less driven by managerial self-interest. As socially responsible firms allocate resources more efficiently, it is important to test whether they pay less bid premium when they make acquisitions. Therefore, we suggest that they are unlikely to pay higher bid premiums to acquire the target. We examine the three-day abnormal price movement and bid premiums and estimate ordinary least square regression models after controlling for a number of M&A features, firm and governance level variables in the models. Our results are presented in Table 8. Not surprisingly, our results support the proposition that CSR-oriented bidders earn significant positive market returns during the mergers and acquisitions announcements as indicated by positive and significant coefficients of ACQCSR variable in the models presented in Columns 1 and 2. The findings remain robust after controlling for a number of firm and governance level characteristic. We find that CSR score is strongly associated with announcement period abnormal returns suggesting the bidders with high CSR score increase value for shareholders as shareholders perceive this decision to be a value-creating one. 12

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Table 9 Robustness tests. Panel A: Alternative proxy of 3-day MAAR (market adjusted abnormal returns) Model

Constant ACQCSR Firm characteristics Governance characteristics Industry fixed effect Year fixed effect Adj. R-squared F-statistics Probability N

1

2

DV = MBR

DV = MBR

−3.9476 (−3.01)⁎⁎⁎ 2.3433 (3.15)⁎⁎⁎ Yes No Yes Yes 0.1351 76.24 0.0000 776

−3.9930 (−2.63)⁎⁎⁎ 2.6717 (2.86)⁎⁎⁎ Yes Yes Yes Yes 0.1540 90.91 0.0000 776

Panel B: longer event windows Window

20 days

Model

1

2

3

4

5

6

Constant

0.1062 (3.14)⁎⁎⁎ 0.0450 (2.09)⁎⁎ −0.0166 (−3.44)⁎⁎⁎ −0.0075 (−1.36) −0.0432 (−1.65) 0.1333 (1.39) 0.0127 (0.31)

0.1130 (3.11)⁎⁎⁎ 0.0505 (2.12)⁎⁎ −0.0163 (−3.18)⁎⁎⁎ −0.0076 (−1.39) −0.0457 (−1.64) 0.1339 (1.41) 0.0138 (0.34) −0.0003 (−0.12) −0.0073 (−0.59) −0.0142 (−0.58) 0.0027 (0.34) 0.0535 (1.64) −0.0050 (−0.66) −0.0021 (−0.27) 0.0133 (1.65) Yes Yes 0.0490 1.23 0.1900 745

0.1467 (3.20)⁎⁎⁎ 0.0725 (2.68)⁎⁎⁎ −0.0230 (−3.58)⁎⁎⁎ −0.0108 (−1.44) −0.0883 (−2.58)⁎⁎⁎ 0.2637 (2.08)⁎⁎ 0.0429 (0.90)

0.1587 (3.30)⁎⁎⁎ 0.0824 (2.87)⁎⁎⁎ −0.0223 (−3.26)⁎⁎⁎ −0.0110 (−1.48) −0.0928 (−2.53)⁎⁎ 0.2649 (2.10)⁎⁎ 0.0447 (0.94) −0.0006 (−0.18) −0.0121 (−0.74) −0.0251 (−0.82) 0.0012 (0.12) 0.0530 (1.42) 0.0012 (0.13) −0.0164 (−1.72)⁎ 0.0209 (2.02)⁎⁎ Yes Yes 0.0644 1.68 0.0133 745

0.1267 (2.10)⁎⁎ 0.1160 (2.93)⁎⁎⁎ −0.0235 (−2.61)⁎⁎⁎ −0.0136 (−1.32) −0.0643 (−1.16) 0.2968 (1.73)⁎ 0.0580 (0.83)

0.1121 (1.79)⁎ 0.1019 (2.51)⁎⁎ −0.0249 (−2.54)⁎⁎ −0.0132 (−1.27) −0.0601 (−1.02) 0.2959 (1.71)⁎ 0.0570 (0.81) 0.0018 (0.37) 0.0088 (0.36) 0.0292 (0.66) −0.0010 (−0.07) 0.1051 (1.90)⁎ −0.0057 (−0.40) −0.0195 (−1.38) 0.0070 (0.48) Yes Yes 0.0350 1.55 0.0319 745

ACQCSR SIZ TOB LEV OCF CAH BZE DUA IND CAO REL URA DOM SIN Industry fixed effect Year fixed effect Adj. R-squared F-statistics Probability N

0.0025 (0.32) 0.0557 (1.73)⁎ −0.0052 (−0.70) −0.0022 (−0.28) 0.0132 (1.63) Yes Yes 0.0519 1.32 0.0862 745

30 days

0.0010 (0.10) 0.0570 (1.56) 0.0008 (0.09) −0.0167 (−1.75)⁎ 0.0206 (2.01)⁎⁎ Yes Yes 0.0663 1.83 0.0065 745

60 days

−0.0011 (−0.07) 0.1005 (1.89)⁎ −0.0050 (−0.36) −0.0190 (−1.35) 0.0070 (0.49) Yes Yes 0.0379 1.68 0.0174 745

This table presents the results of ordinary least-squares (OLS) regression. The dependent variable is ABR. ABR is the 20, 30 and 60 days abnormal price movement from the day before the announcement to the day after the announcement date of the merger and acquisition employing the market model. ACQCSR is acquiring firm actual Corporate Social Responsibility score measured using ASSET4 which include environmental, social and corporate governance scores. All variables are defined in Appendix 1. The p-values based on robust standard errors clustered at the firm level. The tvalues are in the parentheses. All controls variables are defined in Appendix 1. ⁎, ⁎⁎, ⁎⁎⁎ are significant at 10%, 5% and 1% respectively.

13

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We then proceeded to examine the bid premium paid by the CSR firms in mergers and acquisitions. The results are reported in Columns 3 and 4 of Table 8. We controlled for similar M&A features, firm and governance level characteristics in the respective models. The results show that CSR firms pay lower bid premium to target firms which are consistent with our expectation that CSR firms create value for shareholders through the mergers and acquisitions process. The results show that the coefficients of CSR are negative and significant in both models suggesting that CSR score is negatively associated with the premium paid to target firms. These results provide weak support for Hypothesis H3. Together, the results are consistent with our expectation that CSR bidders create value for shareholders through the mergers and acquisitions process. Turning to firm characteristics, we find that the firm-level control variables such as acquiring firm's market capitalization (SIZ) is significant and negative in models 1 and 2 implying that small bidders are more likely to generate more positive abnormal returns than larger sized firms which is consistent with prior studies (Humphery-Jenner and Powell, 2011). The only governance variable (BZE) that is significant is acquiring firms' board size. We also find that the acquiring firm's market capitalization (SIZ) is the only significant firm level variable in explaining the bid premium. Together, these results support the proposition that when CSR firms make acquisitions, they make value-creating acquisition decisions as the market reacts positively to such acquisition decisions. Among the merger and acquisition control variables, cash only acquisitions is significant only at 10% in model 4 whereas unrelated acquisition is highly significant at 1% in models 3 and 4. No other variables were found to be significant among the mergers and acquisitions related characteristics. The adjusted R squared for our models ranges from 2.81% to 8.84%, which is consistent with prior mergers and acquisitions related papers (Goergen and Renneboog, 2004; Lowinski et al., 2004). 4.4.1. Robustness check For a robustness check, we re-estimate the results reported in Columns 1 and 2 of Table 8 using market adjusted cumulative abnormal returns as the dependent variable, and our results are shown in Panel A of Table 9. Our robustness check is consistent with the original analysis as CSR variables are still positive and significant in all models. We also re-estimate the models 1 and 2 reported in Table 8 using three different event windows (20-day, 30-day and 60-day) and the findings are shown in Panel B of Table 9. The results are stronger for the longer event windows analyzed. 5. Conclusion This paper contributes to our knowledge by examining three critical research questions. First, using an Australian sample, we examine whether a firm's corporate social responsibility (CSR) activities influence the choice of the target firm. Second, we examine whether an acquirer's M&A choices/decisions are related to its CSR score. Third, we examine whether market rewards the acquisition announcements of CSR-oriented bidders and whether such firms pay a lower bid premium when they make acquisitions. Our empirical results provide several new insights. We find that targets with CSR activities are more likely to be acquired by CSR-oriented bidder firms. Further, we show that CSR-oriented bidders prefer to engage in M&A through cash payment, buy domestic targets and restrict to single acquisitions in a fiscal year. These acquisition choice imply that managers of CSR firms are concerned about the value maximization goals of corporate managers. Finally, we investigate the acquisition performance of CSR-oriented bidders using three-day cumulative abnormal returns and bid premium paid to targets. We find that the announcement period abnormal return is positive and significant when CSR-oriented bidding firms announce an acquisition decision in the market. We show that CSR firms make investment decisions consistent with shareholders' wealth maximization objectives suggesting that they are better aligned with the other stakeholders of the firm. Consistently, we show that socially responsible firms are more likely to pay a lower bid premium when they pay for acquisitions. Our results are robust to a number of alternative proxies and sensitivity tests. Our paper offers several new insights into the mergers and acquisitions and CSR literature. First, we provide evidence that firmlevel CSR activities are associated with better investment decisions of firms in the context of mergers and acquisitions announcement made by Australian bidding firms. Second, we provide new evidence that CSR-oriented bidding firms are more likely to acquire a target with CSR practice implying that the ethical culture of the target is a significant determinant for choosing a target. This is a fresh insight. Extant research has not examined the relevance of target CSR as a determinant of acquisition choice. Third, our evidence confirms that Australian CSR-oriented bidding firms are less acquisitive, suggesting that CSR-oriented acquirers have a lower propensity to destroy shareholder wealth. An important implication of our study for shareholders and policy makers is that the institution of ethical culture at the firm level is seen to improve the long-run performance of the firm, which is consistent with the ASX's ‘Corporate Governance Principles and Recommendations (2014).’ Overall, our results suggest that the better alignment of stakeholders implied by higher CSR score is beneficial to shareholders.

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Appendix 1. Glossary Variable definitions Variable

Abbreviation

Definition

Dependent variables Target firm CSR score dummy Target firm actual CSR score

TARCSRDMY TARCSR

A dummy variable with the value of one if the target firm has CSR in the year, otherwise zero. Target firm actual CSR score measured using ASSET4, which include environmental, social and corporate governance scores. ABR is the three-day cumulative abnormal price movement from the day before the announcement to the day after the announcement date of the merger and acquisition employing the market model as follows: ABRi

Abnormal return

ABR

Market-adjusted Abnormal return

MBR

MBR is the three-day cumulative market-adjusted abnormal price movement from the day before the announcement to the day after the announcement date of the merger. Daily market-adjusted returns are calculated as follows: MARi,t = Ri,t – Mm,t. Cumulative market-adjusted abnormal return is measured by using

Bid premium

BID

Bid premium is defined as the ratio of the total deal value to the target firm market capitalization 30-days before the M&A announcement date minus one.

ACQCSR

CSR measures of Acquirer actual CSR score

(−1,+1) =

1 +1 AR i,t

these daily abnormal returns as follows: MBRi,t (−1,+1) =

1 +1 MAR i,t

Acquirer CSR score dummy Instrumental CSR Industry level CSR State level CSR Firm-level characteristics Logarithm of market capitalization Tobin's Q Debt ratio Cash flow Cash holding Governance level characteristics Board size CEO duality

ACQCSRDMY

Acquire firm actual CSR score measured using ASSET4, which include environmental, social and corporate governance scores. A dummy variable with the value of one if the acquire firm has CSR in the year, otherwise zero.

CSR_IND CSR_STATE

The average year-industry CSR score The average year-State CSR score

SIZ

The natural logarithm of acquiring firm's market capitalization.

TOB LEV OCF CAH

The market value of total assets to book value of total assets Total debt divided by total assets. The net operating cash flow divided by total assets. Cash scaled by total assets.

BZE DUA

Fraction of independent directors Merger and acquisition characteristics Cash only acquisition

IND

Acquire firm's board size. A dummy variable with the value of one if CEO and the chairman of the board are the same person, otherwise zero. Proportion of independent directors on the board.

Stock only acquisition

STO

Relative size

REL

Unrelated acquisition Domestic Single bidder

URA DOM SIN

CAO

A dummy variable with the value of one if deals are financed with cash only as the payment method, otherwise zero. A dummy variable with the value of one if deals are financed with stock only as the payment method, otherwise zero. The total deal value is divided by acquiring firm's market capitalization of 30 days before the announcement date. A dummy variable with the value of one if the acquisition is a diversifying acquisition, otherwise zero. A dummy variable with the value of one if target firms are domestic, otherwise zero. A dummy variable with the value of one if a bidder has acquired less than two targets in a year, otherwise zero.

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