THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 4

THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 4
Abstract
Scientists around the world agree that emissions significantly, and negatively, impact the
environment and the climate. Governments have put environmental regulation in place in order
to combat this problem, which in turn has led companies to improve their Corporate
Environmental Performance (CEP). The aim of this research is to investigate the relationship
between the CEP of the target company and the takeover premium offered by the acquiring
company in M&A a transaction, and the moderating effect of the degree of institutional
ownership of the acquirer on this relationship. A global M&A sample of 167 deals announced in
the period 2015 to mid-2019 provided empirical evidence that there is a small yet significant
negative relationship between CEP and takeover premiums, and that this negative relationship is
strengthened by the degree of institutional ownership of the acquirer. These results suggest that
CEP is negatively valued by acquirers in M&A transactions, leading to a lower premium offered,
especially if the acquirer is largely owned by institutional investors. These results are rather
puzzling as preceding literature suggest a positive relationship between these variables. Possible
explanations for this could be centered around themes such as stakeholder management, CEO
entrenchment, power-for-premium and green-washing.
Key words: M&A, Takeover Premiums, Corporate Environmental Performance, ESG,
Institutional Ownership
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 5
Table of Contents
PREFACE…………………………………………………………………………………………………………………………….. 3
ABSTRACT………………………………………………………………………………………………………………………….. 4
1. INTRODUCTION …………………………………………………………………………………………………………. 7
1.1. CONCEPTUAL MODEL …………………………………………………………………………………………… 9
1.2. RESEARCH QUESTION…………………………………………………………………………………………. 10
1.3. SCIENTIFIC AND MANAGERIAL RELEVANCE ……………………………………………………. 10
1.4. STRUCTURE………………………………………………………………………………………………………….. 10
2. LITERATURE REVIEW & HYPOTHESES………………………………………………………………….. 12
2.1. INTRODUCTION……………………………………………………………………………………………………. 12
2.2. MERGERS AND ACQUISITIONS……………………………………………………………………………. 12
2.2.1. M&A EMPIRICAL EVIDENCE …………………………………………………………………………………….. 14
2.2.2. TAKEOVER PREMIUM ……………………………………………………………………………………………… 15
2.3. ESG PERFORMANCE…………………………………………………………………………………………….. 17
2.3.1. ESG PERFORMANCE AND FINANCIAL PERFORMANCE……………………………………………………… 19
2.3.2. ESG EMPIRICAL EVIDENCE ………………………………………………………………………………………. 20
2.4. INSTITUTIONAL OWNERSHIP……………………………………………………………………………… 21
2.5. HYPOTHESIS DEVELOPMENT……………………………………………………………………………… 23
2.5.1. TARGET ENVIRONMENTAL PERFORMANCE AND TAKEOVER PREMIUM………………………………. 23
2.5.1.1. M&A Risks Reduction………………………………………………………………………………………. 24
2.5.1.2. Synergies……………………………………………………………………………………………………….. 26
2.5.1.3. Stakeholder Alignment……………………………………………………………………………………… 27
2.5.2. INSTITUTIONAL OWNERSHIP AS A MODERATOR ……………………………………………………………. 28
2.5.2.1. ESG and Institutional Owners……………………………………………………………………………. 29
2.5.2.2. Institutional Investor Activism……………………………………………………………………………. 30
2.6. ENHANCED CONCEPTUAL MODEL ………………………………………………………………………………. 32
3. METHODOLOGY ………………………………………………………………………………………………………. 33
3.1. INTRODUCTION……………………………………………………………………………………………………. 33
3.2. DATA COLLECTION AND SAMPLE SELECTION METHOD………………………………….. 33
3.2.1. SAMPLE ……………………………………………………………………………………………………………….. 33
3.2.2. TAKEOVER PREMIUM ……………………………………………………………………………………………… 35
3.2.3. ESG SCORE ………………………………………………………………………………………………………….. 37
3.2.4. INSTITUTIONAL OWNERSHIP …………………………………………………………………………………….. 38
3.2.5. CONTROL VARIABLES …………………………………………………………………………………………….. 39
3.2.6. VARIABLES OVERVIEW ……………………………………………………………………………………………. 41
3.3. REGRESSION SPECIFICATIONS…………………………………………………………………………… 42
3.4. DESCRIPTIVE STATISTICS…………………………………………………………………………………… 44
3.5. OPERATIONALIZED CONCEPTUAL MODEL……………………………………………………….. 48
4. ANALYSIS & DISCUSSION ………………………………………………………………………………………… 50
4.1. MODEL 1: CONTROL VARIABLES ……………………………………………………………………………….. 50
4.2. MODEL 2: ADDING TIME DUMMIES …………………………………………………………………………….. 51
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 6
4.3. PRIMARY RELATIONSHIP: TARGET ENVIRONMENTAL PERFORMANCE AND TAKEOVER PREMIUM. 51
4.3.1. Testing H1: environmental performance is positively related to takeover premium………… 51
4.4. MODERATING RELATIONSHIP: INSTITUTIONAL OWNERSHIP ON THE PRIMARY RELATIONSHIP ….. 52
4.4.1. Testing H2: the relation between environmental performance and takeover premium is
moderated by institutional ownership ……………………………………………………………………………………………. 52
5. DISCUSSION ……………………………………………………………………………………………………………… 57
5.1.1. CORPORATE ENVIRONMENTAL PERFORMANCE AND TAKEOVER PREMIUM…………………………. 57
5.1.2. THE MODERATING EFFECT OF INSTITUTIONAL OWNERSHIP ……………………………………………… 59
6. CONCLUSIONS………………………………………………………………………………………………………….. 61
6.1. ANSWER TO THE RESEARCH QUESTION ……………………………………………………………………….. 61
6.1.1. ANSWER TO SUB-QUESTION 1…………………………………………………………………………………… 62
6.1.2. ANSWER TO SUB-QUESTION 2…………………………………………………………………………………… 62
6.2. LIMITATIONS ………………………………………………………………………………………………………… 62
6.3. RECOMMENDATIONS ………………………………………………………………………………………………. 64
7. REFERENCES……………………………………………………………………………………………………………. 66
8. APPENDICES …………………………………………………………………………………………………………….. 77
APPENDIX I: DESCRIPTIVE STATISTICS WITHOUT WINSORIZED VALUES ………………………………………….. 77
APPENDIX II: INDUSTRY DISTRIBUTION …………………………………………………………………………………… 77
APPENDIX III: VIF TESTS FOR MULTICOLLINEARITY ………………………………………………………………….. 78
APPENDIX IIII: REGRESSION WITH ROBUST STANDARD ERRORS……………………………………………………. 79
APPENDIX IV: SAMPLE COUNTRY DISTRIBUTION ………………………………………………………………………. 80
APPENDIX IIV: JEREMY DAWSON VARIABLE INTERACTION GRAPH ……………………………………………….. 80
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 7
1. Introduction
Human and business influence on our environment and the state of the planet as a whole has
gained increased attention over the past couple of decades. That our environment has been
changing during this time has been confirmed by scientists from around the world. However, the
fact that we are the cause for the registered sift in our environment, such as warming of the
planet and the subsequent rising see levels, has been a point of heated debate (Meyer, 2012;
NASA, 2019).
Increasing social and political pressure to limit the effects of global warming have given
rise to governmental regulation on emissions and other pollutants, forcing companies to reduce
their influence on the environment. However, many feel that current legislation is still far behind
what is necessary to slow, or even reverse, global warming and the subsequent change in climate.
There are however companies who comply and even exceed the requirements set out by
regulators, not just because of moral conviction, but also because of the economics.
The increased importance of environmental performance of companies has led businesses
to start measuring and reporting on their Environmental Social and Governance (ESG)
dimensions, which are often distilled in a grade of performance relative to other companies. The
academic community has in turn conducted studies examining the link between ESG
performance and Corporate Financial Performance (CFP). However, successfully linking ESG
dimensions to financial ones has not been easy. Some studies show a negative or non- existent
relation (see, e.g., Griffin & Mahon, 1997; Harrison & Freeman, 1999; Waddock & Graves,
1997), while others show a positive relation between ESG dimensions and CFP (see, e.g.,
Brammer & Millington, 2005; Cochran & Wood, 1984; Roman et al., 1999).
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 8
This study aims to complement previous research on the link between ESG dimension
and CFP. This study will be different however in several ways compared to the majority of
preceding studies. I will focus on the environmental dimension of ESG, Corporate
Environmental Performance (CEP), and instead of examining the impact of ESG performance on
the value of the firm as perceived by marginal investors (e.g., conveyed by stock market prices),
I evaluate the impact of CEP performance on the value assigned to firms in M&A transactions. I
furthermore add institutional ownership as a variable to the research. Studies have found that
institutional investors are more active than other shareholders in improving the governance to
firms they are invested in (Dyck et al., 2019a), and are therefore hypothesized to value these
attributes in an M&A transaction, warranting higher premiums. I therefore want to research the
effect of the degree of institutional ownership of the acquiring firms bidding premiums by adding
this variable as a moderator.
The M&A market is studied for the following reasons. First, M&As are important
strategic investment decisions with a significant effect on CFP (Healy et al., 1992), and
shareholders’ wealth (Agrawal et al., 1992; J. Doukas & Travlos, 1988; Masulis et al., 2007).
And secondly, PwC and PRI concluded in their 2012 survey that poor performance on ESG
dimensions can have a significant negative impact on the valuation of a target company and can
be used as a lever in negotiations (PwC, 2012) providing anecdotal evidence of a significant
relationship between ESG dimensions and takeover premiums.
The offered bid premiums are studied because this measure has the advantage of
capturing the difference between the markets perception and the acquirers assessment of the
target, and can be interpreted as a measure of willingness of the acquirer to pay the target above
its pre-takeover market value (Simonyan, 2014). This distinction is of importance as institutional
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 9
investors are expected to be better informed than the marginal investors on the exchange and
more adapt at valuing the intangible attributes of ESG.
Given the growing importance attributed to ESG, understanding its value implications is
worth further investigation. Although anecdotal evidence suggests a positive link between ESGperformance and takeover premiums, attempts to examine this matter empirically are almost
nonexistent, with the notable exception of Gomes & Marsat (2018) who take a global sample of
588 M&A deals in the 2003 – 2014 period. Their research finds a positive link between ESG
dimensions and M&A bid premiums, and specifically for the environmental dimension of ESG
over the other two. This study will also take institutional ownership of the acquirer into account
and will study a sample period of M&A deals after the Paris Agreement in 2015.
1.1. Conceptual model
Here the conceptual model which is at the heart of this research is presented, with the
relationships which are studied are graphically depicted.
Target Environmental
Performance
Takeover Premium
Institutional
Ownership of the Acquirer
Figure 1 Conceptual model
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1.2. Research question
The main research question that supports this study and the conceptual model is the following:
To what extent does environmental performance influence takeover premiums in M&A
transactions and to what existent is this relationship influenced by institutional ownership of the
acquiring firm?
1.3. Scientific and Managerial Relevance
Overall this research contributes to and builds on three main areas in the current literature. First,
I complement studies related to the value implications of ESG, and second, I complement
previous findings on the determinations of bid premiums. Finally, this research aims to
contribute to the literature about institutional ownership and its effect on the decisions of their
portfolio companies.
On a managerial level this research can provide internal corporate decision makers and
external M&A advisors with information vital to developing best practices around ESG and
valuations. Especially if these decisionmakers are expecting to acquire or be acquired in the near
future. It can further provide insight for companies on how their ESG efforts are valued by
external parties, and how to use this to their advantage in the context of M&A.
1.4. Structure
This paper proceeds as follows, section 2 provides explanation and background on the various
concepts involved in this research. Section 3 elaborates on the methodology utilized. Section 4
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 11
displays the empirical results. Section 5 provides discussion on these results. Finally, section 6
provides the conclusions, limitations and suggestions for future research.
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2. Literature Review & Hypotheses
2.1. Introduction
In this section of the research I present a literature review in order to gain a thorough
understanding of the concepts, Mergers and Acquisitions, Takeover Premium, Environmental
Performance, and Institutional ownership, and further develop understanding of the casual
relationship between these concepts. I will start with describing the concepts and provide
empirical background and finalize with the relevance of these concepts to this study. Concluding
the main hypotheses will be formed which will ultimately lead to an enhanced conceptual model.
2.2. Mergers and Acquisitions
Merger and acquisition (M&A) transactions are some of the most significant and impactful
actions taken by firms both as buyers and sellers (Mulherin et al., 2017). M&A is a general term
used for describing the consolidation of two companies. This can take the form of several
transaction types including mergers, acquisitions, consolidations, tender offers, purchases of
assets and management acquisitions. All these transaction types however are often ranked under
M&A and the terms “mergers” and “acquisitions” are often used interchangeably, although they
do hold slightly different meanings.
M&A transactions always include two parties, the buying company or acquirer, and the
selling company or target. In an acquisition the acquiring company buys the shares of the target
company and absorbs the business operations of the target. In legal terms, the target company
therefore ceases to exist, and if it is a listed company, the shares of the target company will stop
trading. In the case of a merger, both companies tend to be of similar size and want to join forces
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 13
to continue operating under one name. In this case, both companies are merged into a new
company and therefore new stocks are issued of this new and combined business entity.
There are many reasons why companies would want to merge with or acquire other
companies. These motivations can include achieving inorganic growth (Hitt et al., 2009),
corporate development (Cartwright & Schoenberg, 2006), or to maintain/build new competitive
advantages (King et al., 2008). They could however also be in the nature of improving the
operations of the company by realizing cost cuts, obtaining efficiency gains or obtaining synergy
gains (Motis, 2007).
The concept of synergy especially, is of great importance to M&A transactions. Synergies
are created when the acquirer and target combined are worth more than the standalone value of
the two separate firms (Simonyan, 2014). Synergy in an M&A context can therefore be
categorized as the potential financial benefit achieved through the combining of companies and
is often a driving force behind a merger. Synergy gains are gains very specific to M&A and
generally include an increase of the production capabilities of the merging parties that go beyond
technical efficiencies (Motis, 2007). The value of these synergies can vary from deal to deal and
estimating these synergies are a crucial part of the preparation process for any M&A transaction,
as this greatly influences what the bidding company is willing to offer for the target. In order to
motivate the current owners of a company to sell their shares, the bidding company usually has
to offer a premium over the intrinsic value or market value of the company in order to entice
investors to sell their ownership stake. Although the determinants of this premium is widely
studied in previous literature, research about the direct impact of the expected synergies on the
acquisition premium remains very limited (Hitt et al., 2009).
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 14
2.2.1. M&A Empirical evidence
Extensive empirical literature in finance has been conducted in the field of M&A from the late
19th century (Mulherin et al., 2017). Researchers have studied the relationship between
individual causes which influence the number of transactions, the value of transactions, the stock
market returns post transaction and structure of deals. This research around causes and effects of
M&A transactions has provided varying results throughout the years (Mulherin et al., 2017). The
basic questions investigated are; why and when do M&A transactions occur, what are the
processes used, and what are the causes behind the economic effects of the transactions, which
are still actively researched to this day.
However, despite the mixed results from past research, researchers have found consensus
on several aspects in the M&A literature. Many finance scholars agree that M&A activity can be
divided into waves, starting with the first wave between 1897 and 1904 (Bodolica & Spraggon,
2015). This first merger wave was fueled by the rapidly expanding markets and plentiful bank
financing where families such as Carnegie, Rockefeller and the Vanderbilts acquired industrial
dominance in the United States through “horizontal” mergers. Following antitrust legislation
combined with rising equity markets inspired a wave of “vertical” mergers in the 1920s. Then in
the 1950s high-priced equity was once again the force to move a wave of post-war M&A’s. The
fourth wave in the 1980s was triggered by high-yield junk bond financing which created a more
lenient attitude towards M&A in competitive global industries and exploding demand of new
products such as pharmaceuticals and computers. During the 1990s until 2001 we experienced
the most recent merger wave which was fueled by de-regulation and new mass-market products
such as mobile phones. This most recent wave, and the largest thus far, peaked in 2000 with $3.5
trillion worth of announced deals (Langford & Brown III, 2004). M&A waves usually go hand in
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 15
hand with bull runs in the equity markets and economic growth, when there is abundant and
relatively cheap access to capital (Harford, 2005). The literature furthermore finds that next to
waves, M&A’s cluster in industry, and are mostly the results of unexpected shocks within a
market or industry, such as deregulation or new technology (Andrade et al., 2001; Harford,
2005).
Less consensus has been evident on the value creation from M&A. The question if M&A
is value creating for the acquiring party has been disputed throughout academic research
(Langford & Brown III, 2004). Many studies have consistently shown negative stock returns for
large listed acquirers (Langford & Brown III, 2004), however Alexandridis et al., found in their
2017 paper that in fact mergers after 2009, resulted in large shareholder gains for the acquirers
(Alexandridis et al., 2017), suggesting that the recession had a large impact on M&A takeover
premiums and subsequent value creation.
2.2.2. Takeover Premium
Takeover premium can be defined as the difference between the purchase price of the equity of a
target company, and the market value of the equity at the time of the transaction. Although these
premiums fluctuate widely across time, industries and deal size, previous research indicates the
average takeover premium to be around 32% with a standard deviation of 26% for listed bidders
(Betton et al., 2008a). Determining the takeover premium is of significant importance for any
M&A deal and is dependent on the value which the acquirer estimates the target company can
add to its own operations. The acquiring company therefore strives to purchase the target at a
premium which is lower than the expected value creation to be obtained by the acquisition in
terms of synergy value, cost cutting or efficiency gains, in order to create value for its own
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 16
shareholders. When the acquiring company wrongly estimates the realized gains from the
acquisition which are below the premium payed for the equity of the target plus any transaction
costs the company has destroyed value for its shareholders. Overpaying for a target is therefore a
big risk in acquisitions as this will result in a value destroying deal for the acquirer. High average
takeover premiums therefore imply that there has to be significant value creation in order for
M&A to be beneficial to the acquiring company’s shareholders (Antoniou et al., 2008).
There are many theories and valuation techniques theorized by academics and used by
investment banks and other financial advisors in order to determine the appropriate value of the
target, and the resulting takeover premium the bidder is willing to offer (Díaz Díaz et al., 2013;
Liu et al., 2007). One of the of the most widely used approaches to determine the value of a
company are the Enterprise Discounted Cashflow (DCF) method, which discounts future
expected cashflows to the presents in order to derive a current enterprise value. Which after
deducting net debt provides an equity value for the company. There are also two broadly used
benchmarking methods first of which is the Comparable Company Analysis (CCA), which
multiplies the Earnings Before Interest Tax Depreciation and Amortization (EBITDA) of the
company with the industry EBITDA multiple. And secondly, the Precedent Transaction Analysis
(PTA), which looks at the EBITDA and multiplies this with the average EBITDA multiple in
comparable transactions.
In the end, both acquirer and target have to agree on a premium and if both parties valued
the target company correctly, shareholders of both companies should financially benefit from the
transaction. At the same time, both parties are trying to obtain the best deal possible for their
shareholders, and therefore negotiations between the target and bidding company on the takeover
premium are of crucial importance.
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 17
Apart from the bidder and the target there are numerous other stakeholders of both
companies who have secondary economic interest in the deal, and who will be affected by the
takeover (Bruner, 2004). M&As are a highly complex activity which requires a dynamic and
accepting attitude of all these stakeholders in order to create value for both parties. This attitude
helps to adapt to unexpected changes in the information provided by the companies which is
crucial for deal and post-merger integration success (Burgelman & McKinney, 2006). The speed
and efficiency during this post-merger integration is therefore of the utmost importance and can
help decide whether a transaction has seen a value increase or decrease and thus weather a
premium paid is justified or not (Burgelman & McKinney, 2006). This alignment within, and
between these companies is therefore of paramount importance to merger success and influenced
by many different factors, including its investments in Environment Social and Governance
dimensions (Aktas et al., 2011; Arouri et al., 2019; Gomes & Marsat, 2018; van Essen, 2018; Yen
& André, 2019).
2.3. ESG Performance
In this section, the concept of ESG performance is explained. After which the link between ESG
performance and financial performance of the company will be clarified and finally empirical
evidence on the concept of ESG performance is presented.
The performance of any company can be measured in many distinct ways. Measuring
‘soft’ elements of the business processes such as the Environmental, Social and Governance
(ESG) dimensions of the company, for which the direct link to the financial performance of the
company is often unclear or hard to measure, have historically been of little importance
compared to traditional financial performance measures. However, with times changing these
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 18
‘soft’ aspects of the business performance are becoming increasingly more important to
companies operational and investment decisions. Especially for financers, as these dimensions
have the potential to significantly impact on overall company performance.
For this study, I will focus on the ‘E’ of ‘ESG’. That is to say, on the environmental
dimension of ESG. Scientists around the world agree that emission and other pollutants related to
production and business significantly, and negatively, impact the environment. In an attempt to
remedy this impact, environmentally conscious investments and business practices have become
ever more important and fascinating to research. However, researching the environmental impact
of a company is no easy feat. Even the effective measurement of environmental impact of a
certain company is inherently difficult as Corporate Environmental Performance (CEP) is widely
acknowledged as a multidimensional construct. The researchers in the field of ecology,
environmental management, and sustainability studies have long faced the dilemma of how
exactly to measure CEP, given the vast array of instruments available and the lack of an
operational definition (Dragomir, 2018).
There are many conceptual frameworks being used, often interchangeably, throughout
academic literature, and businesses, to name, conceptualize and often measure these responsible
and environmental performance concepts. Some of the most widely used concepts are ESG, CSR
(Corporate Social Responsibility), and SRI (Sustainable and Responsible Investing). And
although they all hold slightly different characteristics and approaches, the overarching goals of
all these measures are to quantify those aspects of the business which are traditionally not
directly associated with the company’s financial performance. However, as business owners and
investors have realized, their effect on firm performance can be of significance. Researchers have
found these measures to be of value due to their relevance to investment performance, because of
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 19
client demand, product strategy and ethical considerations (Amel-Zadeh & Serafeim, 2018).
These factors are drivers for the increased value placed in these measures. For the purposes of
this research I will consider academic research investigating all these different concepts and their
effect on takeover premium and use the terminology of ESG throughout the remainder of this
study.
2.3.1. ESG performance and financial performance
While companies’ interest in ESG performance is on the rise, the measurable financial results of
these actions have become of greater importance as well. And although the relation between ESG
and financial performance is still under debate, there are two main theories studied which
attempt to explain the effect of ESG performance on financial performance. These are the
shareholder theory and the stakeholder theory (Arouri et al., 2019; Deng et al., 2013; Gomes &
Marsat, 2018; van Essen, 2018; Yen & André, 2019).
The shareholder theory argues that the business should simply maximize shareholder
wealth (Yen & André, 2019). This view holds that ESG activities constitute an inefficient use of
corporate resources at the expense of shareholder interests, resulting in a transfer of wealth from
shareholder to stakeholders, and ,therefore, hurting the company’s bottom line (Friedman, 1970;
Reinhardt et al., 2008).
On the other hand, the stakeholder theory suggests that strong ESG performance is likely
to enhance the company’s reputation, improve the satisfaction of customers and suppliers, protect
employee rights, and help provide reliable financial reporting, thereby improving corporate
financial performance (Chih et al., 2008; Dhaliwal et al., 2014; El Ghoul et al., 2011; Gelb &
Strawser, 2001). Freeman (1984) defined “stakeholders” as “any group or individual who can
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 20
affect or is affected by the achievements of the firm’s objectives” (p.47), and these stakeholders
are of high importance for post-merger integration and the eventual success of M&A transactions
(Burgelman & McKinney, 2006). Therefore, when a target company has good relationships with
stakeholders, this could increases speed and efficiency of the PMI process (Deng et al., 2013),
and could therefore warrant a higher takeover premium in an M&A transaction.
Stakeholder management furthermore decreases firm-specific risk as this will build
goodwill with these stakeholders which has the potential to reduces cash-flow shocks when
negative events materialize (Godfrey et al., 2009). In other words, making sure stakeholders are
well off, will provide benefits to the company when these stakeholders come under pressure from
negative internal or external shocks. The ESG performance of M&A targets has a positive
influence on the stakeholders of this target company and should therefore be of particular
importance for acquirers (Gomes & Marsat, 2018), and increase the value of the target company.
2.3.2. ESG empirical evidence
Investing in ESG dimensions has developed to remarkable proportions throughout the global
economy with ESG portfolios increasing by more than 324% between 1995 and 2007 (Aktas et
al., 2011). This explosive rise of investment in ESG related investments and portfolios has
sparked the interest of the academic community, yet debate still persists if financial markets care
about ESG dimensions (Aktas et al., 2011). Past studies have found mixed results on whether
ESG dimensions hold any significant link to financial performance of companies (Krüger, 2015).
Margolis, Eifenbein, and Walsh (2009) conduct a meta-analysis of many studies researching this
relationship and conclude that the average relation between ESG and profitability is positive but
small. For the purpose of this research however we will not be focusing on the direct financial
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 21
benefit to a company’s measurable financial performance, but focus more on any additional
benefits from ESG, such as creating goodwill with stakeholders and reducing risk (Arouri et al.,
2019; Cornell & Shapiro, 1987; Deng et al., 2013; Godfrey et al., 2009; Pagano & Volpin, 2005).
The impact of ESG performance on various aspects of M&A has seen some, albeit
limited, empirical research. Several researchers find ESG scores, and specifically the
environmental pillar of ESG, to be an important determinant of takeover premiums and the
likelihood of merger completion (Arouri et al., 2019; Deng et al., 2013; Gomes & Marsat, 2018).
The environmental pillar of the ESG is especially relevant for this study as I separate CEP from
ESG and compartmentalize this specific part of ESG performance in order to discover the effect
of the CEP on M&A takeover premiums.
2.4. Institutional ownership
In many countries around the world, institutional investors have become the dominant players in
the financial markets (S. Gillan & Starks, 2003). Institutional investor ownership relates to the
investment of institutions such as pension funds, insurance companies or mutual funds, in the
equity of a public company in order to create return on this investment for their investors. This is
opposed to retail-investors who trade shares on exchanges in pursuit of the same financial
returns, but operate for their own benefit, and at a much smaller scale. In most countries,
institutional investors are now the largest category of shareholders (Dam & Scholtens, 2012),
meaning they hold more equity assets than all retail investors in that country combined. As these
institutional investors often hold large percentage stakes in companies, they usually have a
considerable amount of influence with the management of these companies.
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 22
There are several ways in which institutional investors can influence management. The
first of which is the voting power which comes with the shares of the company they own. The
second way is that investors use exit and selection to influence firm’s decision making and policy
choices. Both threats would reduce the investor base for the company and hurt stock prices
which managers tend to work hard to avoid (Edmans & Manso, 2010).
Institutional investors have significant resources at their disposal in order to analyze
companies and develop advanced investment thesis’s. Institutional owners retain highly trained
professionals who analyze the risk return implications of their investments and can therefore be
expected to be better informed than retail-investors. When institutional investors have already
invested in a company, they will continue analyzing the company’s potential for future cashflow
generation and in turn the value creation for them as shareholders. This puts institutional
investors in a monitoring role with these companies (S. Gillan & Starks, 2003).
In any company where management and owners are separated there is the danger of
information asymmetry and agency problems. Jensen & Meckling (1976) described agency
problems as the standard problems in the principal-agent relationship between owners and
managers (Jensen & Meckling, 1976), which are per definition complicated, as the interests
between principal and agent are not perfectly aligned (Dam & Scholtens, 2012). When these
agency problems surface, investors are motivated to intervene within the management of these
companies in order to reduce agency costs and information asymmetry and protect their
investment.
One way of reducing this information asymmetry is by motivating management to invest
in ESG which has the potential to reduce agency problems (Calton & Payne, 2003; Jensen, 2001;
Scherer et al., 2007), and target specific risk, to which institutional investors are heavily exposed
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 23
due to investment concentration and high costs of divestitures (Gomes & Marsat, 2018). ESG
with its many dimensions often revolves around proper reporting and signals to investors they
are dedicated to investor relations management, which is highly valued by institutional investors
and their analysis who are monitoring these companies.
2.5. Hypothesis development
In this section of the report, I hypothesize the relationships between the concepts expounded
upon in the previous section and derive hypotheses from the related literature. Each of these
hypotheses is aimed at answering one of the sub research questions of the study.
2.5.1. Target Environmental Performance and Takeover Premium
There have been many studies linking ESG performance of target or acquiring companies to
shareholder wealth creation (Aktas et al., 2011; Deng et al., 2013; van Essen, 2018; Yen &
André, 2019). The results are mixed but tend to show a moderately positive effect of ESG on
shareholder wealth creation for the acquiring company (Deng et al., 2013; van Essen, 2018).
ESG investments might offer positive signals such as higher goodwill and lower risk to a
acquirer (Gomes & Marsat, 2018), or a better reputation (Betton & Eckbo, 2000). On the other
hand, researchers argue that corporate commitments to reduce greenhouse gas emission may
conflict with shareholder value maximization goals (Aktas et al., 2011).
Previous research does indicate a positive relationship between ESG performance of the
target and takeover premiums (Gomes & Marsat, 2018) which is the result of several factors
which influence takeover premiums such as M&A risks, synergies and the stakeholders involved,
each of which is examined in the next sections.
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 24
2.5.1.1. M&A Risks Reduction
In any M&A transaction both parties are exposed to high levels of risk. Great amounts of time
and resources are pledged from both sides in order to make the acquisition work and breaking off
an acquisition attempt can cost both parties not only in financial terms, but also in loss of face
and credibility. Especially bidders are forced to assume a large amount of specific risk because of
investment concentration and the high cost associated with the divestiture of acquired businesses
(Gomes & Marsat, 2018). This is in stark contrast with equity traders on the exchange who can
easily diversify their portfolios and liquidate positions at minimal costs. In terms of risk, equity
investors on the exchange are mainly concerned with systematic risk, M&A bidders are largely
concerned with target specific risks (Gomes & Marsat, 2018).
Companies on both sides will therefore take these risks into account when approaching
any M&A decision including the final decision to accept an offer from the bidding company.
Research has found that acquirers enjoy less completion risk, and faster completion times, when
their targets have solid ESG performance (Arouri et al., 2019; Deng et al., 2013; Pagano &
Volpin, 2005), and therefore potentially increasing the value of the target to the acquirer,
resulting in higher takeover premiums. The mechanism behind these advantages of high ESG
targets reverts back to the previous section on stakeholder theory.
According to the stakeholder view, strong ESG performance should reduce the
probability of a breach in implicit contracts with internal, and with outside stakeholders, and
therefore increase stakeholders’ support of a firm. This commitment to a firm’s explicit and
implicit contracts with key stakeholders plays an important role in the wealth gains of the
acquiring firms’ shareholder (Liang et al., 2017; Masulis et al., 2016; Rhodes‐Kropf & Robinson,
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 25
2008, p.; Shleifer & Summers, 1988). As a result, the acquirers’shareholders should be less
likely to oppose deals conducted with high ESG performance targets (Arouri et al., 2019), and
thus reduce the M&A risk and uncertainty.
Acquirers furthermore have to manage target specific risks, making sure the company
they are about to acquire is able to absorb negative shocks and has a strong market position.
Researchers have found ESG dimensions can provide a form of insurance against event risk and
provide product market differentiation (Hong & Liskovich, 2016; Lins et al., 2017), both
reducing the target specific risk of the target to the acquirer and possibly warranting a higher
takeover premium. This insurance is the product of a better reputation of the firm because of
their ESG performance (Godfrey et al., 2009). This better reputation is also true for regulators
(Hong & Liskovich, 2016), reducing the risk of regulatory intervention during the M&A process.
Therefore, mergers and acquisitions conducted with high ESG targets should result in less
uncertainty of government intervention, or resistance from other market participants.
Finally, researchers have found ESG practices to reduce several forms of financing risks.
As discussed above, ESG raises the reputation of the firm, and therefore increases standing with
financial market participants such as banks and increase access to financing sources (Aktas et al.,
2011). This can be of crucial importance in M&A. All buyers are confident about their ability to
raise the money at the time of announcement, however, a rise in interest rates, an earnings
decline in ether the target or the acquirer, or a declining stock market may all cause financing
difficulties (Arouri et al., 2019). Strong ESG performance could limit the problem through its
reduction of the cost of capital (Dhaliwal et al., 2014; El Ghoul et al., 2011), resulting from a
large relative size of the firm’s investor base and low perceived risks (Arouri et al., 2019). Van
Essen (2018) furthermore suggests firms with better ESG performance have fewer capital
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 26
constraints due to lower agency costs and less information asymmetry through stakeholder
engagement (van Essen, 2018).
It is clear that the current literature on risk reduction in an M&A transaction provides
evidence that the ESG performance of the target company is related to reducing takeover risks.
Risks are an important factor for determining the takeover premium the acquirer is willing to
offer for a target, therefore, this reduction is associated with higher takeover premiums.
2.5.1.2. Synergies
The importance of synergies in M&A transactions cannot be overstated. They are at the heart of
many acquisition decisions and are the aim of most post-merger integration (PMI) efforts.
Therefore, they need to be addressed in the context of ESG performance as well. What
researchers have found to be the most profounding synergies opportunity related to ESG is the
‘learning argument’ which says that an acquirer can learn from ESG policies of the target and
improve its own ESG performance post-merger (Aktas et al., 2011). Applying the resource-based
view of Barney (1991) to this line of reasoning gives a comprehensive understanding of the
potential value enhancement of acquiring higher ESG targets. Barney (1991) argues that
resources and capabilities can be a source of sustainable competitive advantage if they are rare,
valuable, inimitable, and non-substitutable. These criteria are respectively closely linked to the
social environmental dimensions of ESG (Barney, 1991; van Essen, 2018). M&A is therefore a
good opportunity for firms to acquire these critical resources which can achieve a sustainable
competitive advantage (Cochran & Wood, 1984; Waddock & Graves, 1997). Several examples of
acquisitions of high ESG targets in order to boost ESG with the acquiring company are the
purchase of Ben & Jerry’s by Unilever and The Body Shop by L’Orėal (Wickert et al., 2017).
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 27
This learning argument for the acquisition of high ESG companies is echoed throughout
several academic papers. And some researchers have even found that the greater the differences
between ESG in target and acquirer, the more learning potential there is for the acquiring
company (Wang & Xie, 2008), which in turn, might justify a higher takeover premium.
2.5.1.3. Stakeholder Alignment
In an M&A transaction, virtually all stakeholders of both companies are affected. Not only
financial stakeholders such as owners, but also non-financial stakeholders such as employees,
who can have significant effect on the success of the transaction, and post-merger integration.
Directors in many US states even have enacted constituency statutes, also called stakeholder
statutes, which allow target directors to reject a merger offer if they believe that it would have a
negative effect on non-shareholder stakeholders (Deng et al., 2013). Several studies have found
ESG to be a powerful tool to align stakeholders within and between companies. High ESG
companies benefit from good relationships with stakeholders and decrease firm-specific risk
through their building of goodwill which reduces cash-flow instability when negative events
emerge (Cornell & Shapiro, 1987; Deng et al., 2013; Godfrey et al., 2009). ESG performance of
targets should therefore be of great importance for acquirers (Gomes & Marsat, 2018). High ESG
effectively reduces the conflicts of interest between shareholders and other stakeholders by
improving the welfare of both parties, and as a result the integration of the acquirer and the target
is accelerated during the pre-merger negotiations and post-merger integration period (Deng et al.,
2013). Acquirers are likely to be well informed on these advantages which exist with high ESG
targets and incorporate this in the valuation of the target and the final offer price.
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 28
It is clear that environmental performance of the target and takeover premiums in M&A
transactions are connected through several mechanisms, M&A risk reduction, Synergies and
Stakeholder Management are all concepts which are influenced by ESG performance, and in turn
positively influence takeover premiums. This understanding brings us to the first and main
hypothesis of this research.
H1: The environmental performance of a target company raises the takeover premium.
2.5.2. Institutional Ownership as a Moderator
Due to the vast, and growing, amounts of money under management with institutional investors,
these institutions are becoming ever more important to the companies they invest in and their
investment criteria and policies often set the tone for other financial market participants.
Although the goal of institutional investors is to make a return for their investors, they are also
subject to regulation and public scrutiny, which has refocused institutions towards social returns
as well (Dyck et al., 2019b). Especially public scrutiny is becoming more important in recent
years as institutions are working hard to retain and attract investors.
Institutional investors have therefore realized the importance of ESG dimensions for their
performance and image, and have massively moved to make their investment profile more
sustainable, with capital committed to Socially Responsible Investing (SRI) funds increasing
drastically in recent years (Blankenberg & Gottschalk, 2018). There are several mechanisms at
work which motivate institutional investors to pay close attention to ESG dimensions and
incorporate ESG performance of companies in their asset allocation and security analysis
processes, including even shunning specific stocks as a result altogether.
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 29
2.5.2.1. ESG and Institutional Owners
After institutional investors have invested in a company, it is of great importance to them that
this company keeps and exceeds its performance in order to generate an attractive return. When
investors find bad governance practices in these companies, they will use their power as
shareholder to try and mitigate these problems. Research has shown that institutional investors in
particular are effective in improving firm governance (Dyck et al., 2019b).
Institutional investors have found ESG activity and investment to have long term benefits
to the company and its bottom line (Dam & Scholtens, 2012). Companies with high ESG scores
are better in their stakeholder management and limit the degree to which they are affected by
negative shocks with increased reaction time and a better reputation with stakeholders (Dyck et
al., 2019b).
The importance of ESG to institutional investors is increased still further by customer and
social pressure. Evolving investor expectations and demands regarding responsible investing
have pressured institutional investors to adopt ESG dimensions in their investment analysis,
moving away their motivations from only financial returns, towards social returns as well (Dyck
et al., 2019b). Social and environmental norms matter greatly when investors are trying to reflect
the preferences of their beneficiaries, which are increasingly more focused on the environmental
aspects of their investment portfolio (Dyck et al., 2019b). In other words, firms are stepping up
their ESG performance because investors are asking for it.
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 30
2.5.2.2. Institutional Investor Activism
For the reasons stated above, institutional investors are motivated to influence the ESG
performance of their portfolio companies. There are several ways in which institutional investors
can influence management. The first of which is the voting power which comes with the shares
of the company they own. If the institutional investor holds a large enough portion of the
outstanding shares of a company, this voting right can influence decision making within the
company (Edmans & Manso, 2010; S. L. Gillan & Starks, 2000; S. Gillan & Starks, 2003;
Hirschman, 1970). The second way is of a slightly less direct nature and revolves around
evidence that suggests investors use exit and stock selection to influence firms’ decision making
and policy choices (Dyck et al., 2019b). Both threats would reduce the investor base for the
company and hurt stock prices which managers tend to work to avoid, and would result in
transplanting the ESG norms of the institutional investor in their portfolio company (Dyck et al.,
2019b).
Current literature finds a positive relation between institutional investor ownership and
ESG scores of companies (Dam & Scholtens, 2012, 2013; Dyck et al., 2019b), and one study
even finding this relationship to be causal (Dyck et al., 2019b). While the value implications for
retail-investors appear to be ambiguous, their significance for better informed institutional
investors seems well supported in current academic literature (Gomes & Marsat, 2018). Prior
research has also found ESG performance to be significantly positively related with the number
of investing institutional firms (Mahoney & Roberts, 2007).
Institutional investors efforts to improve ESG in their portfolio companies is expected to
extend to the investment decisions of these companies with regard to M&A. As indicated in the
previous section, acquiring companies have the opportunity to see significant benefit from
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 31
acquiring high ESG targets and transfer these properties to their own business practices, together
with a host of risk reduction potential compared to low ESG target. Earlier research has already
found institutional owners to push their portfolio companies towards the acquisition of high ESG
targets (Gomes & Marsat, 2018).
In summary, the increasing demands with institutional investors to adopt ESG dimensions
in their investment analysis by their investors has moved these institutions towards adding
companies to their portfolio with better ESG performance. Research by Dam & Scholtens, (2012,
2013) and Dyck et al., (2019b) has shown a positive relationship between the level of
institutional ownership and the ESG performance of their portfolio companies. Dyck et al.,
(2019b) have furthermore shown that institutional owners transplant their ESG norms with their
porfolio companies, and Gomes & Marsat (2018) show that insititutional owners will push their
porfolio companies towards acquiring high ESG targets.
All these findings sugest that institutional owners excurt pressure on their portfolio
companies to improve their ESG, and also to acquire high ESG targets, creating demand for
these high ESG targets. Basic financial theory teaches that when demand rises, prices rise with it.
In this case, this is the the takeover premium for these targets. I therefore expect institutional
ownership of the acquirer to have a positive moderating effect on the relationship between CEP
and takeover premiums, raising both these variables in an M&A transaction. This brings the
research to the next hypothesis.
H2: A high degree of institutional ownership of the acquirer positively strengthens the
relationship between the environmental performance of the target company and the takeover
premium.
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 32
2.6. Enhanced conceptual model
As a result of the literature review in this section, I modify the conceptual model and indicate the
expected effects of the independent on the dependent variable. The resulting conceptual model
shows the relationships between these concepts graphically and indicates the hypothesis which
are formed to research these relationships.
Target Environmental
Performance
Takeover Premium
Institutional
Ownership of the Acquirer
H1: +
H2: +
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 33
3. Methodology
3.1. Introduction
In this section the methodology of this event study is expounded upon. First the data collection
methods and sample will be discussed, followed by the research measures which are used in the
study. Following this the regression specifications will be provided, and the descriptive statistics
will be presented. Finally, the operationalized conceptual model is stated.
The research method which I use in order to answer the research questions is an event study
approach. An event study is a statistical method to assess the impact of a specific event on the
equity value of a firm. In this study, the announcement of a merger between two companies is the
event, which is analyzed to see whether, and to what degree, the variables CEP and institutional
ownership influence the premium payed for the equity of this company.
3.2. Data Collection and Sample Selection Method
3.2.1. Sample
The initial data set is gathered form the Zephyr database from data provider Bureau van Dijk
(BvD). This is one of the most comprehensive deal related database used by researchers around
the world, and holds data on M&A, IPO, and VC deals, announcements and rumors (Bollaert &
Delanghe, 2015). From Zephyr, a data set of M&A deals are retrieved, together with the stock
price of the target company 64-trading days prior to the announcement and the offer price for the
target’s shares, which forms the initial framework for the database used for this research.
In the first step of data gathering in the Zephyr database the search parameters are set for
the initial data retrieval. I search for all M&A deals globally between January 2015 and October
2019, the time of writing this thesis. I set the scope for data gathering starting in 2015 as this is
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 34
the year the Paris Climate Agreement was signed by 196 countries (Scott et al., 2016). The
signing of the Paris agreement significantly increased the pollution reduction efforts by these
countries by setting strict limits and reduction objectives on carbon emission and other
pollutants. In a large part, these goals have to be met by the companies who operate in these
countries and these directives are therefore written into local laws these companies have to abide
by. This means from 2015 onwards, many companies changed their business processes in order
to comply with new regulation and lower for example their carbon emission (Kinley, 2017).
I expect many companies to have implemented carbon emission reducing processes and
therefore want to look at a sample after the Paris Agreement in order to take this change in the
global business landscape in to account, and prevent the dilution of the results by taking a sample
period which overlaps this transition.
Secondly, I want to focus on M&A bids where the acquirer gains a controlling stake in
the target company, and of which the transaction status is complete. In other words, I select
offers where the bidder initially owns less than 50% of the target firm and seeks to acquire more
than 50% of the target firm. Given the fact that I am trying to assess the impact of target ESG on
premiums, it makes sense to focus on deals involving a change in control rather than just the
acquisition of minority stakes. This is in line with most previous studies on takeover premiums
(Ayers et al., 2003; Betton et al., 2008b; Dionne et al., 2015; Rossi & Volpin, 2004).
Following this, and in accordance with previous research (van Essen, 2018), I remove
deals of under a value of $1 million and arrive at an initial deal sample size of 72,885 M&A
deals.
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 35
Table 1 Deal selection procedure
Selection step Number of deals
Confirmed global M&A deals 2015-2019 621,768
Deal type: Acquisition or Merger 182,504
Controlling stake (over 51%) 171,708
Deal value above $1Million 72,885
Initial deal sample form Zephyr 72,885
3.2.2. Takeover Premium
Takeover premium, also referred to as acquisition premium, is the difference between the equity
value of a company and the actual price paid to obtain it. There are several ways to measure
takeover premiums, in line with Gomes & Marsat (2018) I will use the bid premium instead of
the price actually paid for the firm’s equity. This measure has the advantage of capturing the
difference between the market’s perception, and the acquirer’s assessment of the target, and can
therefore be interpreted as a measure of the willingness of the acquirer to pay the target above its
pre-takeover market value (Simonyan, 2014). I can therefore specifically asses if the excess
amount offered by the acquirer is related to ESG performance. This way of measuring takeover
premiums is specifically relevant for this study as it enables me to examine if institutional
investors with increased exposure to specific risk and superior knowledge of the target value this
information differently compared to the marginal investors on the exchange. The premium also
captures expected synergies resulting from the deal, which is of significance to this research as
hypothesis one expects the relationship between ESG scores and takeover premiums to be
positive, partly due to synergy opportunity.
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 36
In M&A related event studies the takeover premium is usually based on the target’s stock
price a couple of months prior to the announcement of the deal. This lag is to make sure the
premium is computed over a price unaffected by potential takeover rumors which can cause a
runup of the stock price of the target company (Eaton et al., 2019). I therefore follow prior
academic research by Betton et al. (2008), Eckbo (2009) and Bargoron et al. (2008) who use the
stock price of the target 64-trading days prior to deal announcement. The equation used to
calculate the takeover premium can be viewed below. In this equation, t0 indicates the time of
announcement of the deal and t-64 indicates 64-trading days prior to this announcement.
=
( 0 − ℎ −64)
ℎ −64
In order to be able to regress the dependent variable PREMIUM this variable needs to be
transformed. This is because the variable shows high levels of skewness and kurtosis. This can
be adjusted by transforming the premia into natural logarithms. However, in several of the M&A
deals in the data set show negative premia. This means that these targets where acquired with a
discount instead of a premium. As negative values cannot be logarithmically transformed, all
premia are raised by one to create positive premia as the theoretical minimum of this variable is
-100% (Betton et al., 2008b; Vladimirov, 2015). This statistical transformation reduces the
influence of the extreme values on the variance in the sample providing clearer picture of the
relationship between the variable.
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 37
3.2.3. ESG Score
For this research the proprietary ESG data from Thomson Reuters is utilized from their ASSET 4
database. The ASSET 4 database is the most widely used database by fellow researchers in
studies concerning ESG measurements in the context of M&A and is used by Dyck et al,. (2019),
Gomes & Marsat (2018), Yen & Andre (2019) and van Essen (2018) among others. ESG data
from the ASSET4 database is in further accordance with recent prior ESG studies (Cheng et al.,
2014; El Ghoul et al., 2017; Ioannou & Serafeim, 2012), but in contrast with some prior ESG
research of Deng et al. (2013) in the context of M&A who obtained their aggregate ESG values
from Kinder, Lydenberg and Domini (KLD) Research an Analytics Inc, STATS database. This
data however only covers US companies and contains negative (concerns) and positive
(strengths) performance indicators which assumes equal importance of the strength and concerns
scores which is inappropriate, because they are both conceptually and empirically different
constructs (Mattingly & Berman, 2006).
The ASSET4 database gathers ESG data on around 7000 global companies and compares
and rates companies against each other with over 400 publicly available ESG data points
(Teofilovski, 2018). The ESG measure of Thomson Reuters attempts to objectively measure a
company’s relative ESG performance, commitment and effectiveness across 10 main themes (see
table 2) within the three main categories of ESG, based on company-reported data. This
performance is therefore relative to the entire population of other companies researched by
Thomson Reuters. For this study, I will use only the Environmental Pillar Score (EPS) from this
ESG data base.
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 38
Table 2 Thomson Reuters ESG measurement buildup
Environmental Governance Social
Resource use
Emissions
Innovation
Management
Shareholders
CSR strategy
Workforce
Human Rights
Community
Product Responsibility
This ESG data is collected from the Thomson Reuters ASSET4 database for all target
companies through the referencing of their International Securities Identification Number (ISIN),
which reveals that there is limited ESG data available for target companies in this initial data set
and reduces the total number of deals from 72.885 to just 425 deals. There is therefore a bias for
companies which are researched by Thomson Reuters analysts and researchers have found large
companies to have better ESG scores because of their ability to implement better reporting,
indicating a relationship between data availability and ESG scores (Drempetic et al., 2019). Gelb
& Strawser however found that firms disclose more because it is the socially responsible thing to
do, and that companies benefit from stakeholder management by undertaking ESG activities and
that providing extensive and informative disclosures is one such practice (Gelb & Strawser,
2001), which would justifiably increase ESG scores.
3.2.4. Institutional Ownership
The level of institutional ownership is based on the 13F filings with the Securities And Exchange
Commission (SEC), in line with previous research (see, e.g., (Dyck et al., 2019b). This measure
is used as it indicates institutional ownership as a percentage between 0% and 100%. The
institutional ownership percentage is retrieved from the Thomson Reuters ASSET4 database as
well, using the same ISIN referencing technique. This percentage is based on the quarterly 13F
filings from institutional investors with over $100 million under management with the SEC. This
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 39
action reveals that, as in the case of ESG data, institutional ownership data is not available for all
acquiring companies and causes some reduction in the sample size, which is reduced from 425 to
188.
3.2.5. Control Variables
In order to test the hypotheses of this study, other factors besides the firms’ ESG performance
need to be controlled for, in particular, firm-specific and deal-specific characteristics, following
leading M&A research (Deng et al., 2013; Masulis et al., 2007). All control variables for the
target and acquirer are retrieved from DataStream and the deal-specific control variables are
collected from the Zephyr database. In this study, five company-specific, and three deal specific
controls are considered.
First of all, I control for the size of the acquirer. Large firms often overestimate potential
synergy gains and overpay for targets based on hubris hypothesis (Rau & Vermaelen, 1998).
Researchers have found that large firms pay higher premiums and enter deals with negative
synergies resulting in lower returns (Moeller et al., 2004). Therefore, and in accordance with van
Essen (2018), I include the natural logarithm of the market value of the equity to control for
acquires size (ASIZE). Secondly, the profitability of the acquirer is controlled for with the return
on assets (AROA) in line with Easton and Harris (1991). Prior research has furthermore found
that acquirer returns are significantly negatively related to higher free cash flows (AFCF) (Lang
et al., 1991). Which is in line with the free cash flow hypothesis which states that, due to agency
problems, managers of acquires with large free cash flows are more likely to invest in less
beneficial or value destroying M&As, rather than paying it out to shareholders. Secondly, I
include two target-specific control variables, the return on assets of the target company (TROA)
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 40
in line with Shawver (2002) who argues this measure influences the abnormal returns of the
acquires by making targets more attractive for bidders and thus costlier, and the capital
expenditures of the target (TCAPEX). Which is calculated as the capital expenditures divided by
total assets (Gomes & Marsat, 2018).
Next to firm-specific controls, I include deal-specific controls as well. Relative deal size
is an important determinant of the acquires returns (RELDS), and is calculated as the deal value
divided by the acquirers market capitalization (Moeller et al., 2004). Furthermore, I use an
industry diversification (INDDIV) dummy to indicate if the acquisition was intra-industry or not.
There are several studies which find value destroying effects of diversifying deals (J. A. Doukas
et al., 2002; Gomes & Marsat, 2018; Morck et al., 1990), which in turn often warrant a lower
premium. While research has also found that when acquiring and target company operate in the
same industry the acquiring company obtains much higher returns post-transaction (Singh &
Montgomery, 1987), due to an increase in potential synergies (Laamanen, 2007). And finally, I
include a dummy for whether the deal is cross-border or domestic (CROSS), which has
implications for the acquirer. Announcing a cross-border M&A can be seen as an exploitation of
foreign market opportunities and is therefore positively valued by shareholders (J. Doukas &
Travlos, 1988; Eckbo, 1983; Gomes & Marsat, 2018).
As mentioned above, several of the variables used in this study are only available for a
limited number of companies which reduces the sample since for which all relevant data are
available. In table 2 below a breakdown of the data points shows the reduction in sample size
with adding these variables to the database and removing those deals for which data is
unavailable. This process results in a final sample size of 183 deals on which this study and
further analysis are based.
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 41
Table 3 Sample selection procedure
Adding variables to the data set Number of deals
Initial deal sample from Zephyr 72,885
ESG data for target 425
Institutional ownership acquirer 188
Control variables 167
Final sample size 167
3.2.6. Variables overview
On the next page, table 3 shows and categorizes the variables used in this study and indicates the
variables themselves, the kind of variable, the notation, indicates the positive or negative relation
to the depended variable and how this variable is measured. The table furthermore indicates the
database from which these variables are collected.
Table 4 Variable definitions and measurement
Variables Notation Relation Measures
Independent variable
Target Environmental
performance
CEP Positive Thomson Reuters Environmental Pillar
Score
Moderating variable
Institutional Ownership INSOW Positive Thomson Reuters Institutional
Ownership (13F filings)
Company Specific
Control variables
Thomson Reuters DataStream
Size Acquirer ASIZE Negative Natural logarithm of the market value of
the equity of the acquirer
Profitability of the
Acquirer
AROA Positive Return on Assets of the acquirer
Available Cash
Acquirer
AFCF Negative Free Cash Flow of the acquirer
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 42
Variables Notation Relation Measures
Profitability of the
Target
TROA Positive Return on Assets of the target
Capital Expenditure
Target
TCAPEX Negative Capital expenditures divided by total
assets
Deal Specific Control
variables
Zephyr Database (BvD)
Relative deal size RELDS Negative Deal value divided by acquirer total
assets
Industry Diversification INDDIV Negative Created a dummy by comparing the
industry SIC codes
Cross boarder CROSS Positive Created dummy by comparing country
codes
Dependent variable
Acquisition Premium PREMIUM Calculated as the bid price per share
minus the share price of target 64-
trading days before announcement
divided by this same share price
3.3. Regression Specifications
To answer the research questions posed in this study, and to empirically test the two main
hypotheses, the dependent variable acquisition premium (PREMIUM) is regressed by the use of
five regression models which are estimated using the Ordinary Linear Regression (OLS) model.
These models are regressed with five control variables, the independent variable ESG
performance (CEP), and the interaction variable concerning the moderating variable and direct
effect of institutional ownership (INSOW).
Regression Model One: In the first model, the dependent variable acquisition premium
(PREMIUM) is regressed against the control variables and represents the base model. This
model shows the influence of the control variables on the dependent variable acquisition
premium. Model one is represented by the following equation:
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 43
= + 1 + 2 + 3 + 4 + 5
+ 6 + 7 + 8 +
Regression model Two: Regression model two also looks at the control variables and adds
yearly time effects to the model in order to check for time sensitivity of the model.
= + 1 + 2 + 3 + 4 + 5
+ 6 + 7 + 8 + 9 +
Regression Model Three: The output of the third regression model is used to empirically test
the first hypothesis: The environmental performance of a target company raises the takeover
premium. Model two therefore includes the independent variable environmental performance
(CEP) and tests the effect of CEP on the model and the relationship of this measure to the
dependent variable. The statistical hypothesis is therefore that β10 is larger than zero.
= + 1 + 2 + 3 + 4 + 5
+ 6 + 7 + 8 + 9 + 10 +
Regression Model Four: Is used to investigate the direct relationship between the
moderating variable institutional ownership (INSOW) and the dependent variable acquisition
premium (PREMIUM). As the models above, this model will include the control variables as
well. Regression model four is depicted in the equitation below:
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 44
= + 1 + 2 + 3 + 4 + 5
+ 6 + 7 + 8 + 9 + 10 + 11
+
Regression Model Five: The final regression model is used to empirically test the second
hypothesis: A high degree of institutional ownership of the acquirer influences the
relationship between the environmental performance of the target company, and takeover
premiums. This is done by adding an interaction between the independent variable (CEP) and
the moderating variable (INSOW). Model five is defined by the following equation:
= + 1 + 2 + 3 + 4 + 5
+ 6 + 7 + 8 + 9 + 10 + 11
+ 12( ∗ ) +
There the statistical hypothesis states that β12 is larger than zero to indicate an interaction
of these variables. This second hypothesis predicts that the level of institutional ownership of the
acquiring company has a positive effect on the relationship between CEP and takeover
premiums.
3.4. Descriptive Statistics
In this paragraph I dive deeper in the composition of the sample data. I will show several tables
which give an overview and specify the distribution of the data. The annual sample distribution,
descriptive statistics and the Pearson’s Correlation matrix are presented in order to further
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 45
understand the sample and scan for irregularities in the data. In table 1 the annual sample
distribution of M&A deals is depicted. Here we can see that the sample is relatively equally
divided between the years 2015 to 2018, with just a part of the deals in 2019 as this is the year
this research is written. This is due to the fact that only announced and confirmed deals are
included in the sample and M&A deals can regularly take several months to complete.
Table 1 Annual Sample Distribution
Further separation in the data is made on the basis of the different industries the acquiring and
target companies in the sample operate in. There seems to be a no large discrepancies between
the target and acquiring industries and no unusual dependency on one industry. Table 5 shows the
industry distribution separated by the Fama-Frensh industry classifications. See appendix II for a
detailed breakdown based on 49 industries categories.
Year of
Announcement
Freq. Percent
Cumulative
2015 28 16.77% 16.77%
2016 32 19.16 35.93
2017 40 23.95 59.88
2018 55 32.93 92.81
2019 12 7.19 100.00
Total 167 100%
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 46
Table 5 Industry distribution
Fama-French industry code Acquirer Target
Freq, Percent Cum, Freq, Percent Cum,
Finance 48 28,74 28,74 46 27,54 27,54
Business Equipment – Computers, Softwa 32 19,16 47,9 32 19,17 46,71
Healthcare, Medical Equipment, and Drug 18 10,78 58,68 24 14,37 61,08
Oil, Gas, and Coal Extraction and Produ 12 7,19 65,87 13 7,78 68,86
Other – Mines, Constr, BldMt, Trans, H 11 6,59 72,46 12 7,19 76,05
Consumer Non-Durables – Food, Tobacco, 10 5,99 78,45 12 7,19 83,24
Manufacturing – Machinery, Trucks, Pla 10 5,99 84,44 7 4,19 87,43
Wholesale, Retail, and Some Services (L 9 5,39 89,83 6 3,59 91,02
Utilities 6 3,59 93,42 5 2,99 94,01
Telephone and Television Transmission 5 2,99 96,41 5 2,99 97
Chemicals and Allied Products 4 2,4 98,81 3 1,8 98,8
Consumer Durables – Cars, TV’s, Furnit 2 1,2 100,01 2 1,2 100
Total 167 100 167 100
Table 6 shows the winsorised descriptive statistics of the variables included in this empirical
research, including respectively the mean, standard deviation, min, max, skewness and kurtosis.
The variation in takeover premium seems to be generally in line with previous research of
Betton, Eckbo, & Thorburn (2008a). Prior to winsorization, there are however several variables
which are somewhat positively or negatively skewed, with Target Capital Expenditures
(TCAPEX) to be the most significantly skewed. Furthermore, the variable TCAPEX shows the
most significant kurtosis with a value of 52, which is much higher than normal bounds allow for.
This is also true for several of the other variables such as AROA, AFCF, TROA and RELDS.
Also, CEP and INSOW show relatively high kurtosis values. In order to reduce the extreme
values, the above stated variables are winsorized at the 2% and 98% levels which resolves the
kurtosis issue and brings all values to acceptable levels. For the remainder of this study these
winsorized values will be used. A table with the descriptive statistics of the values before
winsorizing can be found in appendix I. The mean values for CEP (40) with a standard deviation
of 19, are broadly in line with values found by Gomes & Marsat (2018).
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 47
Table 6 Descriptive statistics
_w indicates winsorized values, _L indicates logarithmically transformed values
Table 7 shows the Pearson Correlation Matrix, where the correlation test on all variables
included in this empirical study are performed with Stata IC statistical software. The matrix
shows the correlations between the variables with the Pearson’s r statistic, which represents the
correlation between two variables which is presented in the first row, followed by the p-values
between brackets. When the Pearson’s r statistic is close to one or minus one the variables are
strongly correlated to each other. When the Pearson’s r statistic is close to zero, the two variables
are weakly correlated. Positive figures show a positive correlation between the variables and a
negative figure shows negative correlation between these variables.
There are some variables which are significantly correlated with each other. As an
example, the relative deal size (REILDS) and the size of the acquiring company (ASIZE), and
ASIZE and INSOW (institutional ownership of the acquirer), which indicate that the size of the
acquiring company is related to deal size and the level of institutional ownership. This is because
larger companies usually preform larger transactions and are to a larger degree owned by
institutional investors. However, there are also significant correlations found between more
unexpected variables such as between company environmental performance (CEP) and cross
Variable Mean Sd Min Max Skewness Kurtosis
ASIZE 23.22344 1.556064 19.00537 27.38214 .1536324 2.739192
AROA_w 3.920805 5.529801 -13.95512 15.92959 -.5967206 4.992842
AFCF_w 765.2617 2036.623 -2964 8101 1.659684 6.937053
TROA_w 1.299446 11.43628 -43.34613 26.54269 -1.797779 9.263856
TCAPEX_w .0403979 .0483559 .0002446 .2127947 1.97144 6.656559
RELDS_w .0071761 .0198574 9.24e-06 .0931698 3.209801 12.45163
INDDIV .239521 .4280747 0 1 1.220639 2.489961
CROSS .1676647 .3746918 0 1 1.779248 4.165725
CEP_w 39.9471 18.6766 16.23392 87.67301 1.089059 3.248359
INSOW_w 84.26323 16.20041 36.08543 114.281 -.5180533 3.380336
PREMIUM_L .282394 .2256846 -.2002309 1.01706 0.5431446 3.495558
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 48
boarder (CROSS) deals (0.213 significance level 0.01). There are four variables which have a
significant relationship with the PREMIUM, ASIZE, AROA and AFCF at the 0,01 level and
TCAPEX at the 0,05 level.
Table 7 Pearson Correlation Matrix
3.5. Operationalized Conceptual Model
Figure 3 shows the operationalized conceptual model based on the conceptual model presented
in chapter one and the hypotheses described in chapter three. The operationalized conceptual
Pairwise correlations
Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
(1) PREMIUM 1.000
(2) PREMIUM_L 0.985* 1.000
0.000
(3) ASIZE 0.250* 0.260* 1.000
0.001 0.001
(4) AROA 0.158** 0.175** 0.242* 1.000
0.042 0.024 0.002
(5) AFCF 0.315* 0.292* 0.510* 0.434* 1.000
0.000 0.000 0.000 0.000
(6) TROA -0.104 -0.088 -0.060 0.196** -0.039 1.000
0.183 0.256 0.441 0.011 0.618
(7) TCAPEX 0.150 0.162** 0.131 0.036 -0.112 0.026 1.000
0.053 0.037 0.092 0.645 0.149 0.737
(8) RELDS -0.056 -0.053 -0.199** -0.045 -0.097 -0.083 -0.038 1.000
0.476 0.498 0.010 0.568 0.212 0.287 0.629
(9) INDDIV 0.033 0.033 0.198** 0.006 -0.073 -0.010 0.031 -0.048 1.000
0.677 0.674 0.010 0.943 0.351 0.902 0.686 0.541
(10) CROSS 0.033 0.014 0.047 -0.062 -0.038 0.037 0.105 0.012 -0.102 1.000
0.675 0.856 0.544 0.429 0.627 0.636 0.177 0.878 0.191
(11) CEP 0.015 0.000 0.391* 0.054 0.218* 0.063 -0.048 0.010 0.140 0.213* 1.000
0.847 0.999 0.000 0.489 0.005 0.422 0.540 0.901 0.072 0.006
(12) INSOW -0.045 -0.050 -0.307* 0.080 -0.150 0.244* 0.035 0.007 -0.087 0.027 -0.112 1.000
0.566 0.525 0.000 0.302 0.054 0.002 0.652 0.933 0.263 0.730 0.149
* shows significance at the .01 level
** shows significance at the .05 level
_L is natural logarithm
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 49
model shows the hypotheses of this empirical study, relationships between the different variables
and methodologies used to measure the variables and empirically test the hypotheses.
+
+
H2
Target Environmental Performance
Independent variable: CEP
H1: The environmental performance of a
target company raises the takeover
premium
Chapter: 2.3. and 2.5.2.
ESG data from the ASSET 4 Database
(Dyck et al,. (2019), Gomes & Marsat
(2018), Yen & Andre (2019) and van
Essen (2018))
Takeover Premium
Depended variable: PREMIUM
Chapter: 2.2.2. and 3.3.2.
The difference between the equity value
of a company and the bid premium.
(Gomes & Marsat (2018))
Institutional Ownership of the Acquirer
Moderating variable: INSOW
H2: A high degree of institutional
ownership of the acquirer positively
influences the relationship between the
CEP of the target company, and takeover
premiums.
Chapter: 2.4. and 3.3.4.
Institutional ownership data from the
ASSET 4 Database based on 13F filings
with the SEC.
H1
Figure 2 Operationalized conceptual model
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 50
4. Analysis & Discussion
Before running the regressions, the variables CEP and CEPxINSOW are centered in order to
solve the problem of multicollinearity which arises from adding an interaction term. Before
centration, the VIF values for CEP and CEPxINSOW where 30.37 and 31.82 respectively. Much
higher than the threshold of 10. After centration these values are 1.26 and 1.17 respectively. See
Appendix III for a table with the full VIF test results.
Five regression models are run in order to investigate the research question. Model 1
investigates the correlations between the dependent variable and the control variables. In model
2, time effects are added which shows an increase of explanatory power as, indicated by the Rsquared, from 13,6% to 21,5%. The following regression models the independent, moderating
and interaction variables are added.
4.1. Model 1: control variables
In model one, the control variables together with the dependent variable PREMIUM are
regressed indicating positive as well as negative significant coefficients. A positive relationship
(0.814) is found at the significance level 0.05 regards to the capital expenditures of the target.
This is as expected as in the regression uses positive values instead of negative ones. This
relationship is therefore in fact a negative one. This is in line with previous research which
indicates that the more capital expenditures are necessary for the company to operate its assets
the riskier the company is (Shawver, 2002).
A negative relationship (-0.00000264 at significance level 5%) is found between the free
cash flow of the acquirer and the PREMIUM. This is in line with the free cash flow hypothesis
which states that, due to agency problems, managers of acquires with large free cash flows are
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 51
more likely to invest in less beneficial or value destroying M&As, rather than paying it out to
shareholders (Liang et al., 2017). The R-squared for this model is 0.141, which indicates the
explanatory power of the model to be around 14%. In model 2 yearly time effects are added,
which increases explanatory power of the model with 7,4% to 21,5%. In the following models
the independent, moderating and interaction variables are added, which all show an increase of
the R-squared.
4.2. Model 2: adding time dummies
In the second regression model time dummies are added to the variables regressed in model 1 in
order to control for time effects in the regression. This has significant effect on the adjusted Rsquared which increases from 0.0977 to 0.1543, a percentage increase of 58%. These time
dummies are therefore added to regression three trough five. This model is a good fit with the
data with an F-statistic of 3.52 and probability F of 0.0001.
4.3. Primary relationship: target environmental performance and takeover premium
This study aims to research the primary relationship between the CEP of target companies and
the takeover premium acquires bid for these targets. This relationship is expected to be positive
with rationale for this hypothesis provided in chapter 2.
4.3.1. Testing H1: environmental performance is positively related to takeover premium
The regression shows that there appears to be a small significant negative effect of CEP on
PREMIUM (-0.00171 at significance level 1%). This is in opposition to the main hypothesis of
this study which expected the relationship to be significantly positive, and therefore in line with
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 52
Gomes & Marsat (2018). To conclude, the results formed by the third regression model lead to
the rejection of the first hypothesis.
This model is therefore significant and furthermore a good fit with the data with a F value
of 3.53 at a probability of 0.0001.
4.4. Moderating relationship: institutional ownership on the primary relationship
Besides the primary relationship also the moderating effect of institutional ownership (INSOW)
on this primary relationship is measured by regression model five. The rationale behind the
expectations of this hypothesis are presented in chapter 2.5.2. and expect this moderator to
strengthen this primary relationship.
4.4.1. Testing H2: the relation between environmental performance and takeover
premium is moderated by institutional ownership
This relationship is tested with the fifth regression model, as shown in table 7, which indicates a
significantly negative relationship (-0,0000987 at significance level 1%). This indicates that there
is a significant strengthening effect of INSOW on the primary negative relationship between CEP
and PREMIUM found, which is in opposition to the hypothesis of this study. Preceding research
has shown institutional owners transplanting their ESG values in portfolio companies increasing
their ESG performance (Dam & Scholtens, 2012, 2013; Dyck et al., 2019b), and pressuring them
towards acquiring high ESG targets (Gomes & Marsat, 2018). The empirical evidence from this
study shows that this does not extend to the premium these portfolio companies bid on target
companies, and therefore that the level of institutional ownership does not provide a positive
mediating effect on the primary relationship.
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 53
The explanatory power for the model increased marginally by adding the INSOW
variable, which is raised slightly with 0,02% from 23,1% to 23,3%. With an F (3.31) value and
probability F 0.0001, this regression is a good fit of the data indicating that the model
significantly predicts the outcome of the dependent variable. To conclude, these regression
results conclude that there is no significantly positive moderating effect of institutional
ownership on the primary relationship between CEP and takeover premium, and hypothesis two
therefore needs to be rejected. For a graphical representation of the interaction of CEP and
INSOW on the dependent variable PREMIUM see appendix IIV.
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 54
Table 6 Regression Output
Control
Variables (CV)
Control
Variables (CV)
CV +
Independent
variable (IV)
CV + IV+
Moderator (M)
CV + IV+ M
+ Interaction
Model 1 Model 2 Model 3 Model 4 Model 5
Variables () () () () ()
Constant -0.0786 0.178 0.0103 -0.0403 0.0233
(0.306) (0.317) (0.330) (0.341) (0.341)
Control variables
ASIZE 0.0128 0.00574 0.0131 0.0153 0.0124
(0.0135) (0.0136) (0.0141) (0.0146) (0.0146)
AROA 0.00255 0.00379 0.00348 0.00321 0.00374
(0.00346) (0.00344) (0.00343) (0.00346) (0.00345)
AFCF 2.64e-05** 2.52e-05** 2.63e-05** 2.64e-05** 2.52e-05**
(1.08e-05) (1.05e-05) (1.05e-05) (1.05e-05) (1.05e-05)
TROA -0.00181 -0.00236 -0.00210 -0.00228 -0.00262*
(0.00151) (0.00149) (0.00148) (0.00151) (0.00152)
TCAPEX 0.814** 0.837** 0.762** 0.749** 0.743**
(0.358) (0.351) (0.352) (0.353) (0.351)
RELDS -0.105 -0.157 -0.000507 0.0177 -0.153
(0.860) (0.839) (0.838) (0.840) (0.841)
CROSS 0.00646 -0.000525 0.0168 0.0158 0.0287
(0.0453) (0.0441) (0.0449) (0.0450) (0.0453)
INDDIV 0.0140 0.0232 0.0310 0.0317 0.0241
(0.0409) (0.0397) (0.0397) (0.0398) (0.0398)
Independent Variable
CEP -0.00171* -0.00172* -0.00197**
(0.000986) (0.000988) (0.000992)
Moderating Variable
INSOW 0.000656 0.000243
(0.00109) (0.00111)
Interaction
CEPxINSOW -9.87e-05*
(5.72e-05)
Time Effects No Yes Yes Yes Yes
F-statistic 3.25 3.52 3.53 3.29 3.31
Significance F 0.0019 0.0001 0.0001 0.0001 0.0001
R-squared 0.141 0.215 0.231 0.233 0.247
Adjusted R-squared 0.0977 0.1543 0.1653 0.1618 0.1726
Obs. 167 167 167 167 167
Standard errors are in parenthesis
*** p<0.01, ** p<0.05, * p<0.1
CEP and CEPxINSOW are centered in order to solve multicollinearity
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 55
4.5. Testing for robustness
In order to ensure the accuracy of the analysis, I conduct multiple robustness checks. First of all,
the assumption of absence of multicollinearity which is essential to discern before running the
regressions, is tested. As mentioned in the previous section, multicollinearity was discovered
between the CEP and CEPxINSOW variables which was corrected for by centering these
variables before running the regressions.
Secondly, I check for heteroscedasticity. Heteroscedasticity is an effect in a statistical
sample that involves variation which is not equal across the whole range of predicted values
(Long & Ervin, 2000). As heteroscedasticity is a well-documented matter in M&A literature
(Gaspar & Massa, 2007; Massa et al., 2013) both the Breusch-Pagan Test and the Abridged
White’s Test are conducted in order to test for heteroscedasticity.
4.5.1. Testing for Heteroscedasticity Breusch-Pagan Test
The first test performed to check for heteroscedasticity is the Breusch-Pagan Test. To test for
heteroscedasticity in the sample, hypotheses are formulated. The null hypothesis, which states
that there is homoscedasticity present in the model. Second, the alternative hypothesis, which
states that there is heteroscedasticity present in the model. First, the model is regressed as
described in chapter three including the residual outputs. Then, the residuals are squared and
regressed as Y-variable against the original X-variables. Finally, if the regression performed is
statistically significant (significance – f value of less than .05), the null hypothesis of
homoscedasticity is rejected and therefore the alternative hypothesis of heteroscedasticity is
accepted (Koenker & Bassett Jr, 1982; White, 1980). The result of the Breusch-Pagan Test
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 56
results in a p value of 0.0767, higher than 0.05 which means we accept the H0 and recognize the
data has constant variance.
4.5.2. Testing for Heteroscedasticity Abridged White’s Test
In order to check these results, the Abridged White test is utilized. First of all, and similar to the
Breusch-Pagan Test, there are two hypotheses formulated that are empirically tested. First, the
null hypothesis which states that there is homoscedasticity present in the model. Secondly, the
alternative hypothesis which states that there is heteroscedasticity present in the model. The
following steps are taken to come to the results of the Abridged White’s Test. First, the regressed
residuals of the models are used. Second, these squared residuals are regressed as Y-variable
against the predicted- and the predicted squared Y-variables included as X-variables in the OLSregression. And finally, if the regression performed is statistically significant (significance – f
value of less than .05), the null hypothesis of homoscedasticity is rejected and therefore the
alternative hypothesis of heteroscedasticity is accepted (Long & Ervin, 2000; White, 1980). The
result of the Abridged White Test comes back with a p value of 0.0712 which is higher than 0.05
which means we accept the Ha of homoscedasticity and constant variance. A full regression
model with robust errors can be found in appendix IIII.
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 57
5. Discussion
This chapter includes the discussion of the empirical findings presented in chapter four. First the
findings on the relationship between the dependent and independent variable (hypothesis 1) is
discussed in section 5.1. Secondly, the effect of the moderating variable on this relationship
(hypothesis 2) is discussed in paragraph 5.2.
5.1.1. Corporate Environmental Performance and Takeover Premium
The results obtained from the empirical research show some unexpected results. According to the
results defined by this research, there appears to be a negative relationship between corporate
environmental performance and acquisition premium. These results are in contrast to the findings
of Gomes & Marsat (2018), who find environmental performance to be positively valued in
M&A deals. The results are therefore more in line with the shareholder theory, and the rationale
that environmental investments constitute an inefficient use of corporate resources at the expense
of shareholder interests (Yen & André, 2019).
An explanation for the deviation from the results as found by Gomes & Marsat (2018)
could be that they take a sample of M&A deals from 2003 to 2014, before the signing of the
Paris Agreement. This would indicate that takeover premiums for targets with relatively high
CEP to have decreased after this agreement, which is rather counter intuitive. A possible
explanation could be the anecdotal evidence which has surfaced that investors such as hedge
funds punish companies that green-wash by short selling these companies (Reuters, 2019). This
negative relation between CEP and PREMIUM can therefore possibly be attributed to the risk of
misreporting of ESG dimensions and the negative implications this could hold for the acquirer.
The sample size in this study is also significantly smaller than the study of Gomes & Marsat
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 58
(2018) who performed analyses on a sample of 588 M&A deals, which has the potential to
influence results as well.
Another possible explanation could be that the companies who have good environmental
performance do so because of an entrenchment strategy of the CEO, explained by the
overinvestment hypothesis of Barnea and Rubin (2010), which argues that managers may seek to
overinvest in ESG-related activities for their private benefit. They could strategically commit
themselves and company resources to ESG-activities aimed at gaining stakeholders’ support to
ultimately strengthen their own position within the firm (Arouri et al., 2019). Complementary to
this, these CEO’s might trade power for premium when acquired, meaning CEOs would trade
accepting a lower premium for power and control in the merged company (Wulf, 2004).
Yet another example could be that, companies with high ESG scores generally also have
good stakeholder management. These companies would therefore not only look at the financial
return, but also what this transaction would mean for their stakeholders. They could therefore
possibly accept a lower takeover premium in order to make sure these stakeholders are taken
care off.
Another possible explanation could be that the ESG performance of high ESG targets is
already priced into the share prices of these companies, making them relatively expensive and
would deter from valuing ESG ‘again’ in the takeover premium.
Another possible explanation could be as follows. If the synergy potential between target
and acquirer is high, but the risks are high too, there is a good chance acquirers will not engage
with this potential target. However, when synergy opportunity is low, but risk is low too, there is
little downside to doing an offer at a relatively low premium.
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 59
A final explanation could be that this study has one or more omitted variables which have
a strong correlation with CEP and a negative influence on takeover premiums, providing an
incomplete or distorted picture of the primary relationship.
The conclusion from this analysis is opposite to that of Gomes & Marsat (2018), and out of
line with the hypothesized relationship and indicates a negative relationship between the CEP (as
proxied by ESG Environmental Scores) and the takeover premium post Paris Agreement.
5.1.2. The moderating effect of institutional ownership
Apart from the primary relationship also the moderating impact of institutional ownership seems
not to be as expected. The evidence indicates the negative relationship between CEP and
PREMIUM is strengthened (e.g. made more negative) by a higher degree of institutional
ownership, instead of increasing PREMIIUM as was hypothesized. Preceding literature shows
that institutional owners influence the ESG performance and M&A choices of their portfolio
companies (Dyck et al., 2019b; Gomes & Marsat, 2018). This study provides evidence that this
desire for high ESG targets does not translate in to bid premiums their portfolio companies offer
for targets.
As can be seen from the preceding section, there are several possible explanations why
this study has found a negative opposed to positive relation, and several of these are strengthened
by the level of institutional ownership.
When companies get caught green-washing this will significantly damage not only the
reputation of this company, but also the share price. Investors on the exchange will devalue the
company and these companies might even become the target of short sellers (Reuters, 2019).
Institutional investors know these risks all too well and will therefore ensure their portfolio
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 60
companies adjust for this risk when bidding on target companies with high ESG, resulting in a
strengthening effect of the negative relationship between CEP and PREMIUM.
A similar effect could take place with CEOs who entrench themselves in a company by
overinvesting in ESG. Overinvesting is wasteful, and therefore lowers the cash generation
potential of the business. Institutional investors would be sure to adjust for this risk with the
M&A decisions of their portfolio companies. This, again, would strengthen the primary
relationship.
Institutional investors are some of the most sophisticated investors in the world. If they
come to the conclusion that the share prices of a potential target of one of their portfolio
companies is already valued high on the exchange, they would ensure the CEO of their portfolio
company does not overpay, bringing down premiums, and strengthening the relationship between
CEP and PREMIUM.
Finally, not an insignificant part of the takeover premium comes down to the negotiations
between the CEO’s of both companies. Acquiring companies with highly sophisticated and
powerful intuitional investors behind them could very well be better positioned to bargain down
the takeover premium, and therefore strengthen the primary relationship.
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 61
6. Conclusions
This chapter answers the sub-questions and thereby central research question of this thesis. The
answers to these questions are based on the literature review as presented in chapter two, the
empirical findings are described in chapter four, and the discussion according to previous
academic- and empirical literature in chapter five.
6.1. Answer to the research question
This research has sought to provide evidence of a positive relationship between corporate
environmental performance and take over premiums. The main research question which was
formulated as the basis of reaching this goal is stated as follows:
To what extent does environmental performance influence takeover premiums in M&A
transactions and to what existent is this relationship influenced by institutional ownership of the
acquiring firm?
This research question can be sub divided in to two separate sub-research questions:
Sub-Question 1: To what extent does environmental performance
influence takeover premiums in M&A transactions?
And
Sub-Question 2: To what existent is this relationship influenced
by institutional ownership of the acquiring firm?
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 62
6.1.1. Answer to Sub-Question 1
The empirical evidence provided in this study shows a small yet significant negative relationship
between the independent variable CEP and the dependent variable PREMIUM. This is in
opposition to what was hypothesized. It can therefore be concluded that corporate environmental
performance is not valued positively when target companies’ value is analyzed by acquiring
companies. In contrast, this even seems to have a small but significant negative effect on the
takeover premium. This conclusion holds within the scope of this research, which is different
from prior research as a recent and different sample of M&A deals is studied.
6.1.2. Answer to Sub-Question 2
The empirical evidence provided in this study shows a small yet significant negative effect of
institutional ownership of the acquiring company on the relationship between CEP and takeover
premiums. From this it can be concluded that while CEP is mildly negatively valued in M&A
transaction, when the acquiring firm has a high degree of institutional ownership this effect is
amplified slightly and will result in a further decrease in the takeover premium. A further
inference from this could be that institutional investors do not value CEP in M&A transactions to
a larger degree than other investors.
6.2. Limitations
The empirical analysis and subsequent results presented in the study aim to provide reliable and
verifiable conclusions with regard to understanding CEP and takeover premiums. There are
however some limitations to this research that require mentioning.
First of all, the research was hampered by the limitations of ESG and institutional
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 63
ownership data availability. Due to the low availability of these measures the sample size was
reduced significantly from over 70 thousand M&A deals to under 200 deals. This indicates there
is a bias towards the companies which are well covered by research analyst.
This also resulted in a lack of country diversity in the sample. Although the abovementioned measures are also tracked for non-US companies, the data sources that were used tend
to include predominantly companies from the United States. This has resulted in the fact that
88% of all target and bidding companies within this sample are from the US, with just 12%
originating from other counties, even though the scope of data collection on deals was on a
global scale. This has resulted into a predominantly US sample which might not be completely
representative for the entire population of global M&A deals. For a full overview of the country
composition of the sample see appendix IV.
There is furthermore an inherent problem with measures of ESG. There are several
companies databases (Thomson Reuters ASSET4, Bloomberg ESG Database, Sustainalytics etc.)
which measure ESG dimensions, and studies have shown there is little correlation between the
scores provided by these different data providers (Berg et al., 2019). This therefore makes it hard
to measure the exact performance of companies on environmental dimensions and research CEP
in general. As this is a data inherent problem this will likely only improve in the future when
measuring, often intangible CEP dimensions, becomes much more precise and effective.
The final limitation of this study is the way some of the variables still present high levels
of skewness and kurtosis even after winsorizing these values. Future research should investigate
if the outcomes significantly change if these variables would first be logarithmically
transformed, before winsorization. This has the potential to better measure the relationships as
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 64
the influence of the extreme values is reduced more effectively than just utilizing the
winsorizaiton method.
To conclude, there seem to be quite some limitations to this study. However, as the
research is constrained by the public- and institutional availability of historical M&A, ESG and
institutional ownership data, and also the limited time availability in which this thesis has to be
executed, this empirical research has been conducted to the maximum level professionalism.
6.3. Recommendations
In line with previous academic literature and the limitations mentioned above, several
recommendations for further research are given. The first section of this paragraph includes
recommendations from the managerial perspective, followed by some recommendations for
future empirical research.
The negative relationship which has been shown by this empirical study can be used by
company decision makers and M&A advisors alike in order to further understand the role of CEP
in their business and how these practices might influence future mergers and acquisitions.
Although the relationships found are small, they are statistically significant and should therefore
be taken into account by any stakeholder who is aiming to take a holistic approach to valuing a
target company.
One of the recommendations for future research on the influence of CEP on takeover
premiums, is to focus more specifically on the influence of the Paris Agreement. The results of
this study (post agreement) and that of Gomes & Marsat (2018) (pre agreement) differ in a
significant way, even finding an opposite relationship. Future research could check the influence
of a pre/post Paris Agreement sample window on the effects of CEP on takeover premiums in
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 65
order to determine if this has had a significant effect on the results or that there is another reason
why the results of both studies are contradictory.
Another recommendation would be to use samples based on data from several different
data providers for the ESG scores on which CEP is based. All these measures have their strong
and weak points and comparing these results might provide indication on what measure fits the
M&A business case best.
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 66
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8. Appendices
Appendix I: Descriptive statistics without winsorized values
_L indicates logarithmically transformed values
Appendix II: Industry distribution
Freq, Percent Cum,
Business Services 25 15 15
Banking 24 14 29
Electronic Equipment 15 9 38
Petroleum and Natural Gas 12 7 46
Real Estate 12 7 53
Medical Equipment 7 4 57
Insurance 6 4 60
Food Products 5 3 63
Chemicals 5 3 66
Utilities 5 3 69
Pharmaceutical Products 4 2 72
Retail 4 2 74
Trading 4 2 77
Candy & Soda 3 2 78
Entertainment 3 2 80
Machinery 3 2 82
Communication 3 2 84
Computer Hardware 3 2 86
Computer Software 3 2 87
Wholesale 3 2 89
Apparel 2 1 90
Healthcare 2 1 92
Transportation 2 1 93
Recreation 1 1 93
Printing and Publishing 1 1 94
Consumer Goods 1 1 95
Rubber and Plastic Products 1 1 95
Construction 1 1 96
Automobiles and Trucks 1 1 96
Aircraft 1 1 97
Defense 1 1 98
Precious Metals 1 1 98
Variable Mean Sd Min Max Skewness Kurtosis
ASIZE 23,22344 1,556064 19,00537 27,38214 0,1536324 2,739192
AROA 3,781027 6,673974 -39,73442 23,35134 -1,953162 14,63362
AFCF 791,4816 2354,244 -5642 16201 2,464491 14,94494
TROA 0,7714058 15,19307 -108,8515 38,75409 -3,649841 24,61826
TCAPEX 0,0439179 0,072073 0,0000471 0,7333274 5,853931 52,19041
RELDS 0,0079179 0,0238415 1,99E-07 0,1746686 4,124124 22,2943
INDDIV 0,239521 0,4280747 0 1 1,220639 2,489961
CROSS 0,1676647 0,3746918 0 1 1,779248 4,165725
CEP 39,99094 18,99662 12,76261 95,69054 1,120519 3,431149
INSOW 84,12778 17,04444 19,37881 124,3129 -0,7582387 4,590377
PREMIUM_L 0,282394 0,2256846 -0,2002309 1,01706 0,5431446 3,495558
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 78
Freq, Percent Cum,
Personal Services 1 1 99
Restaraunts, Hotels, Motels 1 1 99
Almost Nothing 1 1 100
Total 167 100.00
Appendix III: VIF tests for multicollinearity
Before centration After centration
Variable VIF 1/VIF VIF 1/VIF
ASIZE 2.04 0.489701 2.04 0.489701
AROA 1.44 0.696630 1.44 0.696630
AFCF 1.79 0.559596 1.79 0.559596
TROA 1.19 0.842748 1.19 0.842748
TCAPEX 1.14 0.880916 1.14 0.880916
RELDS 1.10 0.910968 1.10 0.910968
CROSS 1.14 0.880022 1.14 0.880022
INDDIV 1.14 0.873390 1.14 0.873390
2016 1.82 0.550891 1.82 0.550891
2017 2.02 0.495187 2.02 0.495187
2018 2.31 0.433074 2.31 0.433074
2019 1.45 0.691106 1.45 0.691106
CEP 31.31 0.031940 1.35 0.739309
INSOW 5.53 0.180986 1.26 0.791148
CEPxINSOW 32.25 0.031003 1.19 0.840001
Mean VIF 5.84 1.49
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 79
Appendix IIII: Regression with robust standard errors
Control
Variables (CV)
Control
Variables (CV)
CV +
Independent
variable (IV)
CV + IV+
Moderator (M)
CV + IV+ M
+ Interaction
Model 1 Model 2 Model 3 Model 4 Model 5
Variables () () () () ()
Constant -0.0786 0.178 0.0103 -0.0403 0.0233
(0.332) (0.372) (0.384) (0.386) (0.380)
Control variables
AZIZELN 0.0128 0.00574 0.0131 0.0153 0.0124
(0.0149) (0.0156) (0.0162) (0.0164) (0.0162)
AROA 0.00255 0.00379 0.00348 0.00321 0.00374
(0.00384) (0.00423) (0.00424) (0.00427) (0.00430)
AFCF 2.64e-05** 2.52e-05** 2.63e-05** 2.64e-05** 2.52e-05**
(1.08e-05) (1.05e-05) (1.07e-05) (1.06e-05) (1.06e-05)
TROA -0.00181 -0.00236 -0.00210 -0.00228 -0.00262*
(0.00139) (0.00157) (0.00155) (0.00154) (0.00152)
TCAPEX 0.814** 0.837** 0.762** 0.749** 0.743**
(0.327) (0.347) (0.358) (0.362) (0.358)
RELDS -0.105 -0.157 -0.000507 0.0177 -0.153
(0.700) (0.713) (0.711) (0.707) (0.678)
CROSS 0.00646 -0.000525 0.0168 0.0158 0.0287
(0.0577) (0.0552) (0.0556) (0.0561) (0.0568)
INDDIV 0.0140 0.0232 0.0310 0.0317 0.0241
(0.0507) (0.0479) (0.0474) (0.0477) (0.0478)
Independent Variable
CEP -0.00171* -0.00172* -0.00197**
(0.000915) (0.000926) (0.000923)
Moderating Variable
INSOW 0.000656 0.000243
(0.000970) (0.000993)
Interaction
CEPxINSOW -9.87e-05**
(4.62e-05)
Time Effects No Yes Yes Yes Yes
R-squared 0.141 0.215 0.231 0.233 0.247
Obs. 167 167 167 167 167
Standard errors are in parenthesis
*** p<0.01, ** p<0.05, * p<0.1
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 80
Appendix IV: Sample country distribution
Appendix IIV: Jeremy Dawson variable interaction graph
Country
Target Freq, Percent Cum,
Country
Acquirer Freq, Percent Cum,
US 148 88,62 88,62 US 147 88,02 88,02
CA 5 2,99 91,61 BM 4 2,4 90,42
GB 4 2,4 94,01 GB 4 2,4 92,82
AU 2 1,2 95,21 CH 3 1,8 94,62
BM 2 1,2 96,41 IE 3 1,8 96,42
CY 1 0,6 97,01 NL 3 1,8 98,22
DE 1 0,6 97,61 AN 1 0,6 98,82
FR 1 0,6 98,21 CA 1 0,6 99,42
IL 1 0,6 98,81 JE 1 0,6 100,02
KY 1 0,6 99,41
SE 1 0,6 100,01
THE INFLUENCE OF ENVIRONMENTAL PERFORMANCE ON M&A PREMIUMS 81

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