Do environmental, social, and governance standards improve the bargaining power of bidders? An empirical investigation

Drawing from the bargaining power hypothesis, we investigate the impact of environmental, social, and governance (ESG) standards on takeover premiums in the international takeover market. Using an international sample of 8336 mergers and acquisitions from 26 bidder countries between 2003 and 2021, we find that bidders with higher pre-deal ESG standards - ESG champions - pay lower premiums to win the bid auction, suggesting that better engagement of stakeholders provides higher bargaining power to ESG champions. Contrary to the stylized fact that bidders destroy shareholder value in mergers and acquisitions, the results show that all bidders are not the same, and those with higher ESG standards enjoy takeover benefits. We also show that board independence and minority shareholder protection are potential channels through which ESG champions pay fair premiums to targets. Finally, the results document that ESG champions select targets from dissimilar industries and engage in cross-border deals to strengthen their reputation among stakeholders. Our results pass several robustness tests and hold after addressing the endogeneity issue. Overall, our findings dispense new evidence on how ESG standards increase the bargaining power of focal firms to negotiate on better terms with targets.