Non-Linear Impact of Environmental, Social, and Governance Scores on Deal Premiums

Increasingly, scholars have been researching how ESG ratings appear to impact the returns of a merger as well as the expected synergies of the merger. This paper adds to the literature by using a non-linear method to test the impact that ESG ratings, differences in ESG ratings between the acquirer and the target, and ESG components have on the deal premium. We find overwhelming evidence, using multiple deal premium measurements, of an inverted U-shaped relationship between the target’s ESG scores at the time of the announcement and the deal premium. Moreover, we find some evidence that differences between the ESG scores of the acquirer and the target also impact the deal premium but in a U-shaped relationship. Finally, our results show that the social scores of both the acquirer and the target impact the deal premium, again in an inverted U-shaped manner, as does the governance rating of target, but only in relatively smaller deals.