Elsevier

Finance Research Letters

Volume 43, November 2021, 102007
Finance Research Letters

Is corporate social responsibility an agency problem? An empirical note from takeovers

https://doi.org/10.1016/j.frl.2021.102007Get rights and content

Highlights

  • We examine whether the acquirer's CSR performance influences takeover premiums.

  • Our framework relies on the agency motives of the takeover premium.

  • We consider a large sample of US takeovers over the period 1992–2014.

  • Higher acquirer CSR performance is associated with higher takeover premium.

  • Findings are robust and consistent with the shareholder expense view.

Abstract

We rely on the agency motives of the takeover premium to empirically examine whether and how the acquirer's corporate social responsibility (CSR) performance influences the premiums paid in takeovers. Using a large sample of US takeovers that took place over the period from 1992 to 2014, our results mainly reveal that higher CSR performance at the acquirer level is associated with higher takeover premium which is consistent with the shareholder expense view. Our results continue to hold after a battery of additional analyses.

Introduction

Corporate social responsibility (CSR) performance and motives have been in the spotlight for empirical research for decades. The overarching research question is that why firms would invest significant resources in CSR practices. The stakeholder view maintains that CSR practices and profit are not mutually exclusive. Based upon this view, firms investing more in CSR would meet the requirements of various stakeholders which ultimately would be beneficial for the focal firms’ shareholders (Aktas et al., 2011; Arouri et al., 2019; Deng et al., 2013; Ferrell et al., 2016; Gomes and Marsat, 2018; Wong et al., 2020). However, the shareholder expense view holds that CSR practices manifest an agency problem between managers and shareholders. In other words, managers commit to CSR activities to build reputation and gain private benefits (Harper and Sun, 2020; Jiraporn and Chintrakarn, 2013; Surroca and Tribó, 2008).

These opposing views have produced mixed results as to the impact of CSR on firm valuation. They thus lead to an important empirical question about which theory is borne out in reality and provides a warrant for further investigation. In this study, we contribute to this debate and shed light on the issue by focusing on takeovers, in which conflict of interests between managers and shareholders can potentially exacerbate. More specifically, we empirically examine how acquirer's CSR performance influences the takeover premium.

Acquirers pay a large premium over the market value of the target to gain control. Prior research suggests that, on average, the premium paid to target amounts to 40% to 50% (Eckbo, 2009; Fralich and Papadopoulos, 2018). It is axiomatic that the higher the premium, the lower the ultimate returns to the acquirer from a given acquisition (Datta et al., 2001; Haunschild, 1994; Hayward and Hambrick, 1997; Varaiya and Ferris, 1987). Agency issues at the acquirer level has been one of the prevailing explanations for the large premium payments. Managers pay huge premium to increase firm size, diversify the business, and make themselves irreplaceable (Shleifer and Vishny, 1988). Thus, the high premium paid is not a valuation error but to reap personal benefits from takeovers by managers. Consistent with this view, Gondhalekar et al. (2004) find that agency problem at the acquirer level is the main determinant of the high premium paid in takeovers. Accordingly, when compensations and corporate governance board oversight are designed in such a way that potentially align the managers’ interests with those of shareholders’ interests, lower premium is paid for the target (Bargeron et al., 2008; Datta et al., 2001; Levi et al., 2014).

Whether and to what extent acquirer's CSR performance is associated with the takeover premium is an important question and has significant value implications for both acquirer and target shareholders. In a notable study, Krishnamurti et al. (2019) use a sample of 149 Australian takeovers and find that acquirers with high CSR performance tend to pay lower premium. Our study differs, however, from them in at least two main aspects. First, we consider takeovers that took place in the United States where corporate regulations, societal preferences, and institutional variables with regard to CSR performance are significantly different as compared to Australia. Since these factors vary from country to country (Liang and Renneboog, 2017), the obtained results from one country may not be generalizable to other countries. Second, our study distinguishes between CSR strengths and concerns as they are different constructs (Bouslah et al., 2013; Mattingly and Berman, 2006). While these studies employ CSR performance measures given by Thomson Reuters Assets4, we use CSR performance ratings given by MSCI ESG Research formerly known as Kinder, Lydenberg, and Domini (KLD). CSR performance rating agencies do not follow the same metric and criteria in measuring the firms’ CSR performance and thus using different sources of ratings could provide more evidence on the link between acquirers’ CSR performance and M&A activities.

We argue that if CSR practices are voluntary initiatives with a conflict resolution objective among stakeholders while increasing shareholders value, firms with high CSR performance would have lower agency problems. Therefore, we would expect them to opt for value-maximizing investments and accordingly pay lower premium, ceteris paribus. However, if CSR activities are manifestation of the agency problem and managers use them to build reputation and gain private benefits, then we would expect that firms with high CSR performance would further take non-value-maximizing investments and pay higher takeover premium.

To examine these competing predictions, we use a sample of 564 US completed takeover transactions that took place between publicly listed firms over the period of 1992 to 2014. Our results reveal that higher CSR performance at the acquirer level is associated with higher takeover premium which is consistent with the shareholder expense view and in contrast with those reported by Krishnamurti et al. (2019). Our results continue to hold under different specifications and alternative measurements of our main variables.

To address the potential concerns related to the endogenous choice of CSR performance, we use the Propensity Score Matching method. Our findings from the Propensity Score Matching analysis suggests that acquirers with higher CSR performance pay higher premium relative to comparable acquirers with lower CSR performance. Accordingly, this study provides novel insights into the literature by showing how the acquirer CSR performance affects the premium paid in takeovers.

Section snippets

Sample and research design

Our sample consists of completed US domestic takeovers between listed firms over the period of 1992 to 2014 and are recorded in Thomson Reuters’ Eikon M&A database. Following Dionne et al. (2015), we include transactions that are in the forms of: merger, acquisition of assets, acquisition of major assets, and acquisition of certain assets. Further, we needed acquirer to own less than 5% of the target's shares before the deal announcement and more than 50% after the deal completion, the method

Results

Table 4 reports the main regression results of Eq. (1). All models include year and industry dummies to control for unobserved macroeconomic factors. Given our concern regarding multicollinearity in our regression models, we examined the variance inflation factor (VIF). We include VIFs for each model at the bottom of the regression table. All VIFs are within the acceptable range. The highest VIF is 2.6, which is well below the conventional rule of thumb of 10 (Neter et al., 1996) and a more

Conclusion

Motivated by the opposing views and inconclusive findings as to the impact of CSR on firm valuation, we study how acquirer CSR performance is associated with the premium paid in takeovers. According to the agency motive of the takeover premium, stakeholder view predicts a negative association between acquirer CSR performance and the takeover premium, whereas shareholder expense view predicts a positive association. Using a sample of 564 US completed takeover deals that took place between

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Acknowledgments

We are grateful to Professor Jonathan Batten (the Co-Editor-in-Chief) and the two anonymous referees for helpful comments and remarks that have greatly improved the quality of our manuscript. The first author, Mussa Hussaini, gratefully acknowledges the financial support from the Tore Browaldh Foundation.

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