Mind the CSR Gaps in Corporate Acquisitions

Abstract

This study examines the impact of corporate social responsibility considerations in corporate acquisitions. We illustrate how the difference in environmental and social performance between the target and acquirer prior to a deal influences the acquirer’s subsequent changes in these aspects post deal. By analyzing a large dataset of M&A transactions in the U.S., we find a positive impact of the pre-deal gap on the acquirer’s post-deal improvement in environmental and social performance. Our findings will support the learning theory of merger integration. Overall, our study highlights the significance of corporate social responsibility in major firm transactions and the pivotal importance of learning and capability transfer in the M&A integration process.

1. Introduction

As public awareness grows, there is a rising focus on corporate social responsibility (CSR) or a company’s environmental, social, and governance (ESG) performance, garnering more interest from both academics and finance practitioners. A recent research from the Global Impact Investing Network (GIIN) [1] reports that the size of the impact investing market stands at $1.16 trillion in assets under management in 2022. Impact investment is growing significantly and showing strong momentum despite COVID-19 disruptions. To attain the United Nations’ Sustainable Development Goals (SDGs) by 2030 and achieve net zero emissions by 2050, much effort has been collectively made across the government, institution, and public levels. In the recent United Nations Climate Change Conference 2023, COP28, funding climate change initiatives was a major focus for national and industry leaders. At the company level, firms are actively driving sustainability efforts in their corporate investments to foster positive environmental and social development, aiming to serve all people and the planet. In the academic literature, research indicates a strong association between a company’s ESG standards and various facets of firm performance and corporate characteristics [e.g., 2, 3, 4, 5, 6, 7]. While there has been a stream of literature examining the impact of corporate governance, our study here focuses on the two relatively less explored dimensions, namely the environmental and social performance of firms. Specifically, we investigate the impact of pre-deal target and acquirer performance in the merger integration process, and how this contributes to shaping the post-deal environmental and social standards of the acquirers.

2. Hypothesis development and related literature

Research has demonstrated that a firm’s environmental performance significantly affects its financing costs [8, 9, 10, 11, 12], risk management practices [13, 14], and stakeholder engagement [15, 16]. Scholars have also explored the relevance of a firm’s social behavior to its business performance [17, 18, 19, 20]. This study extends current research on firms’ environmental and social policies by examining their impact in the context of mergers and acquisitions, a significant form of corporate investment. Deng and Kang [21] illustrate that acquirers with stronger CSR practices generate greater shareholder wealth in M&A transactions, aligning with stakeholder value maximization theory. Previous studies, such as those by Bereskin, et al. [22], Alexandridis, et al. [23], utilize a firm’s CSR as a proxy for corporate culture and find that similarities between acquirer and target firms lead to more successful integration processes. More recent studies further explore the CSR in relation to the various aspects of M&A transactions, demonstrating the significant importance of this concept [24, 25, 26].

Engaging in merger and acquisition (M&A) transactions stands as a significant corporate strategy for fostering firm growth [27]. Nonetheless, although merger synergy is typically anticipated upon announcement, it frequently falls short of delivering on its operational and financial objectives in the post-transaction phase [28, 29, 30]. While various factors influence merger outcomes, the matter continues to be a subject of ongoing research in the finance and management literature. Post-merger integration has been recognized as a pivotal determinant of M&A success [e.g., 31, 32, 33, 34, 35, 36].

According to the learning theory of post-merger integration, specific firm attributes, such as cultural disparities and corporate governance capabilities, can create opportunities for sharing resources and transferring knowledge, thus facilitating learning and value generation [e.g., 37, 38, 39, 40]. In Wang and Xie’s study [41], they illustrate that the gap in corporate governance quality between the acquirer and the target fosters synergy creation, consequently enhancing the wealth derived from the deals. While corporate governance is a fundamental aspect of firm attributes, the environmental and social dimensions of ESG have received less attention in the existing literature, particularly concerning their impact on M&A transactions. As post-merger integration affects multiple areas of firms’ attributes following deal completion, both acquirers and targets undergo consolidation in various aspects of their operations and policies, including environmental and social practices. A comparative advantage in the environmental and social performances holds the potential for dissemination and adoption throughout the merged entity. For instance, the target’s advanced pollution control infrastructure, which aids in reducing environmental penalties, could be extended across the entire firm following deal closure.

Therefore, we posit that a disparity between the target and acquirer in environmental and social practices presents learning opportunities, contributing to improving the acquirer’s performance in these areas post deal, thus embracing a “best of both” approach.

Hypothesis 1: A gap in environmental performance between the target and acquirer prior to the deal has a positive impact on the acquirer’s subsequent change in environmental performance post deal.

Hypothesis 2: A gap in social performance between the target and acquirer prior to the deal has a positive impact on the acquirer’s subsequent change in social performance post deal.

3. Data and variables

3.1 Sample and data

To conduct our empirical investigation, we utilize a dataset comprising 306 completed transactions announced between 1996 and 2012, with environmental and social data available up to 5 years after the deals were finalized. The acquirers and targets in our sample deals consist of U.S. public firms.

To analyze the environmental and social performance of firms, we obtain the ESG data from the KLD database, which has been widely cited and used in corporate social responsibility research. Our investigation focuses on how the disparity in environmental and social performance between target and acquirer firms before a deal influences the changes in the performance of those dimensions for the acquirer in the post-deal stage. We use the environmental and social data from the KLD database and measure this gap as the disparity between the target and acquirer firms’ environmental and social scores in the year before the deal announcement. This metric allows us to evaluate the target’s performance relative to the acquirer’s in each transaction, thereby providing a proxy for the target’s relative superiority in environmental and social performance, which could hence offer a learning benefit through capability transfer in a deal.

In this study, our focus lies on the outcome variables which entail the changes observed in the acquirer’s environmental and social performance post deal. For each transaction, we calculate the acquirer’s change in its environmental and social scores, comparing data from the year preceding the deal announcement to 3–5 years after the deal finalization, thereby examining longer-term effects, in line with the well-documented observation that M&A integration is a long-term process, which typically takes years to complete Renneboog and Vansteenkiste [35]. Thus, our analysis of the acquirer’s environmental and social performance changes during the three to five years following deal completion sheds light on the integration dynamics in these domains during the post-deal phase of the combined business entities. Furthermore, we explore the spectrum of subcategories of environmental and social performance to delve deep into the deal’s impact on these dimensions with greater detail. To isolate the marginal effect of the pre-deal gap on environmental and social outcomes, we include a comprehensive set of controls for the relevant firm and deal characteristics as well as industry and year fixed effects in our empirical models. The detailed definitions and explanations of all variables are demonstrated in Table 1.

Variable	Definition	Source
Environmental and Social Gap
Environmental_Gap	The difference between the target environmental score and the acquirer environmental score in the year before the announcement.	KLD
Social_Gap	The difference between the target social score and the acquirer social score in the year before the announcement.	KLD
Environmental Social_Gap	The difference between the target and acquirer environmental and social aggregate scores in the year before the deal announcement.	KLD
Outcome Variables
Δ ES (−1 to +j)	Change in acquirer environmental and social aggregate score from one year before announcement to j years (j = 3–5) following deal completion.	KLD
Δ E (−1 to +j)	Change in acquirer environmental score from one year before announcement to j years (j = 3–5) following deal completion.	KLD
Δ S (−1 to +j)	Change in acquirer environmental social aggregate score from one year before the announcement to j years (j = 3–5) following deal completion.	KLD
Deal and Firm Characteristics
Industry Relatedness	Indicator variable: One if the first two digits of the acquirer and target primary standard industry classification (SIC) codes are the same zero otherwise.	SDC
Tender Offer	Indicator variable: One if the form of a deal is a tender offer, zero otherwise.	SDC
Hostile	Indicator variable: One if a deal is hostile, zero otherwise.	SDC
Toehold	Indicator variable: One if an acquirer already holds a positive percentage of the target shares at the announcement, zero otherwise.	SDC
Relative Size	The ratio of the target market value of equity to the sum of the acquirer and target market value of equity four weeks before the deal announcement.	CRSP
Pct Stock Payment	The percentage of stock payment involved in a deal.	SDC
Size	Firm size, the natural logarithm of total assets in the fiscal year before deal announcement.	Compustat
MTB	The market value of equity is divided by the book value of equity measured in the fiscal year before the deal announcement.	Compustat
Cash	Cash holdings, including cash and marketable securities, normalized by total assets, in the fiscal year before the deal announcement.	Compustat
ROA	Operating cash flows over total assets in the fiscal year before the deal announcement.	Compustat

Table 1.

Variable definitions.

This table provides variable definitions and corresponding data sources. CRSP refers to the Centre for Research in Security Prices, SDC refers to the Thomson Reuters Securities Data Company, and KLD refers to the Kinder, Lydenberg, and Domini environmental, social, and governance (ESG) database.

3.2 Descriptive statistics

Table 2 presents the descriptive statistics for the environmental and social variables used in our empirical analysis. Panel A outlines the summary statistics of the gaps in environmental and social performance between target and acquirer firms prior to deals, which serve as our key independent variables of interest. The mean environmental and social gap in our sample is −0.467, with the minimum gap observed at −9 and the maximum at eight. This indicates that, on average, targets exhibit lower environmental and social scores compared to acquirers prior to deals. For a detailed breakdown, the mean environmental gap between targets and acquirers in our sample stands at −0.294, while the mean social gap is −0.173.

	N	Mean	SD	min	p5	p25	p50	p75	p95	max
Panel A: Environmental and Social Gap
Environmental Social_Gap	306	−0.467	2.391	−9	−5	−2	0	1	3	8
Environmental_Gap	306	−0.294	1.095	−4	−3	0	0	0	1	4
Social_Gap	306	−0.173	1.845	−6	−4	−1	0	1	3	6
Panel B: Outcome Variables
Δ ES (−1 to +3)	306	1.131	2.492	−5	−2	0	1	2	6	10
Δ ES (−1 to +4)	279	1.233	2.637	−4	−2	−1	1	3	6	10
Δ ES (−1 to +5)	248	1.810	2.942	−5	−3	0	1	4	7	11
Δ E (−1 to +3)	306	0.562	1.161	−3	−1	0	0	1	3	4
Δ E (−1 to +4)	279	0.699	1.265	−3	−1	0	0	1	3	5
Δ E (−1 to +5)	248	0.786	1.307	−2	−1	0	0	1.5	3	5
Δ S (−1 to +3)	306	0.569	2.016	−5	−2	−1	0	1	4	10
Δ S (−1 to +4)	279	0.534	2.096	−4	−3	−1	0	2	5	9
Δ S (−1 to +5)	248	1.024	2.431	−5	−3	0	1	3	5	9

Table 2.

Variable descriptive statistics.

This table reports the summary statistics of the key environmental and social gap variables and outcome variables used in our empirical tests. The number of observations, mean, standard deviation, min, 5th, 25th, 50th (median), 75th, 95th percentiles, and max are reported from left to right, in sequence for each variable.

Panel B presents the statistics of the outcome variables, which illustrate the changes in acquirers’ environmental and social scores during the three to five years following deal completion compared to their respective benchmarks before the deal announcement. These variables serve as the key dependent variables of interest in our regression analysis. Over the three-year post-deal timeframe, acquirers exhibit an average improvement of 1.131 in their overall environmental and social scores. Specifically, the mean improvement in environmental scores is 0.562, while the corresponding average change in social scores is 0.569. Upon comparing changes over the three to five years post-deal period, we observe an increase in the magnitude of environmental and social score improvements for the acquirers. The extent of change in these scores demonstrates a consistent increase from three to five years post deal, indicating that the integration of environmental and social standards into the acquirers’ business operations is a gradual process, with its effects progressively reflected and becoming more pronounced in the long-term post-deal phase.

4. Empirical results

In this section, we present the empirical findings on the outcome variables related to the acquirer’s change in environmental and social performance in the post-deal stage.

4.1 Univariate tests

To explore the influence of the pre-deal environmental and social gap between the target and acquirer on the acquirer’s ES performance change in the post-deal stage, we commence by conducting univariate tests to examine this relationship.

Table 3 illustrates the univariate analysis conducted through the two-tailed t-tests. We partition our sample into subgroups based on positive and negative ES_Gap (Panel A), E_gap (Panel B), and S_Gap (Panel C), respectively. Within each subgroup, we examine the trends in the acquirer’s environmental and social performance changes during the three to five years post-deal completion relative to their pre-deal standards.

Panel A: Environmental Social Total Gap
	ES_Gap >0			ES_Gap <= 0			t-test (two-tailed)
	N	Mean	Std Dev	N	Mean	Std Dev	p-value
Δ ES (−1 to +3)	96	1.438	2.783	210	0.990	2.342	0.146
Δ ES (−1 to +4)	92	1.935	2.946	187	0.888	2.406	0.002	***
Δ ES (−1 to +5)	82	2.561	3.19	166	1.440	2.747	0.005	***
Panel B: Environmental Gap
	E_Gap >0			E_Gap <= 0			t-test (two-tailed)
	N	Mean	Std Dev	N	Mean	Std Dev	p-value
Δ E (−1 to +3)	26	1.077	1.324	280	0.514	1.136	0.018	**
Δ E (−1 to +4)	25	1.240	1.640	254	0.646	1.213	0.025	**
Δ E (−1 to +5)	23	1.217	1.678	225	0.742	1.259	0.097	*
Panel C: Social Gap
	S_Gap >0			S_Gap <= 0			t-test (two-tailed)
	N	Mean	Std Dev	N	Mean	Std Dev	p-value
Δ S (−1 to +3)	99	1.111	2.290	207	0.309	1.820	0.001	***
Δ S (−1 to +4)	92	1.424	2.331	187	0.096	1.823	0.000	***
Δ S (−1 to +5)	83	2.000	2.504	165	0.533	2.246	0.000	***

Table 3.

Univariate test on the environmental and social gap.

This table reports the univariate tests of the impact of the target-acquirer pre-deal environmental and social gap on post-deal acquirer change in environmental and social performance. Panel A reports the statistics for the environmental and social gap. Panel B reports the test on the environmental gap. Panel C reports the results on the social gap. The p-values from two-tailed t-tests are presented in the last column for the positive versus negative gap subgroups. *, **, and *** denote statistical significance at the 10%, 5%, and 1% level, respectively.

In Panel A, we note that the positive ES_Gap subgroup exhibits a change in the acquirer’s environmental and social performance over three years of 1.438 in score magnitude, whereas the negative subgroup shows a change of 0.990. Additionally, the disparity between these subgroups widens over the three to five-year post-deal period, reaching statistical significance at the 1% level for the five-year difference. Therefore, the univariate test suggests that transactions featuring a positive ES_Gap tend to lead to a more substantial enhancement in the acquirer’s post-deal environmental and social standards. In Panel B and Panel C, the subgroups are constructed based on the pre-deal target-acquirer E_Gap and S_Gap, respectively. Here, a similar pattern emerges regarding the post-deal change in the acquirer’s environmental and social performance as observed in Panel A, where subgroups with positive pre-deal gaps tend to result in a significantly larger magnitude of post-deal change in the respective performance metrics.

Therefore, our univariate tests reveal a positive relationship between the pre-deal target-acquirer environmental and social gap and the subsequent change in the acquirer’s performance post deal. Given the observed pattern in the univariate analysis, we advance to explore this relationship using a more comprehensive multivariate framework in the following section, incorporating diverse firm and deal characteristics in the analysis for robustness.

4.2 Environmental gap

To assess the impact of M&A deals on a firm’s environmental performance, we conduct a multivariate ordinary least squares regression analysis using our sample of M&A transactions. In Table 4 Panel A, we present OLS regressions that investigate the effect of the pre-deal target-acquirer relative environmental (E) gap on the acquirer’s subsequent change in environmental performance, measured over the 3–5 years following deal completion. To isolate the marginal effect of the pre-deal environmental gap, we incorporate controls for the relevant deal and firm characteristics, while also incorporating year and industry fixed effects across our regression models to ensure robustness in our tests.

Panel A: Change in overall Environmental Performance
	(1)	(2)	(3)
	Δ E	Δ E	Δ E
	(−1 to +3)	(−1 to +4)	(−1 to +5)
Environmental_Gap	0.520***	0.561***	0.492***
	(0.000)	(0.000)	(0.000)
Observations	306	276	246
Adjusted R-squared	0.341	0.400	0.413
Constant	Yes	Yes	Yes
Firm controls	Yes	Yes	Yes
Deal controls	Yes	Yes	Yes
Industry Fixed Effects	Yes	Yes	Yes
Year Fixed Effects	Yes	Yes	Yes

Panel B: Change in Categorical Environmental Performance
	(1)	(2)	(3)
	Δ Environmental Subcategories (−1 to +3)
	Climate Change	Env. Regulation	Product Impact
Environmental_Gap	0.134***	0.049**	0.032
	(0.000)	(0.037)	(0.187)
Observations	306	280	276
Adjusted R-squared	0.188	0.164	0.17
Constant	Yes	Yes	Yes
Firm controls	Yes	Yes	Yes
Deal controls	Yes	Yes	Yes
Industry Fixed Effects	Yes	Yes	Yes
Year Fixed Effects	Yes	Yes	Yes

Table 4.

Change in post-deal environmental performance.

This table reports the ordinary least squares (OLS) regressions of the impact of the target-acquirer pre-deal environmental gap on post-deal acquirer change in environmental performance. The dependent variable is the acquirer change in environmental scores from the year before announcement to 3, 4, and 5 years post-deal completion. Panel A presents the impact on the overall environmental performance. Panel B presents the impact on the major categorical environmental performance. The key independent variable of interest is the target-acquirer pre-deal environmental gap in the year before the announcement. We report p-values in parentheses. *, **, and *** denote statistical significance at the 10%, 5%, and 1% level, respectively.

The empirical results consistently show positive coefficients for the pre-deal environmental gap, with strong significance at the 1% level across all three test models under different three to five years post-deal timeframes. According to the results in column (1), a one standard deviation increase in the pre-deal environmental gap between the target and acquirer is associated with a 0.57 increase in the acquirer’s three-year post-deal environmental score change. Given that the sample mean for the three-year post-deal change in the acquirer’s environmental score is 1.161, this represents a 49.0% increase in the acquirer’s Δ E (−1, +3) for an average deal in our sample. Therefore, the positive relationship between the pre-deal environmental gap and the subsequent change in the acquirer’s environmental performance is both statistically and economically significant, providing strong support for our Hypothesis 1. Hence, our results demonstrate a learning benefit and capability transfer between the target and acquirer in the field of environmental performance during the post-deal period.

We then delve deeper to conduct a comprehensive analysis of the various subcategories within the environmental dimension to explore the factors contributing most significantly to such capability transfer benefits. In Panel B, we focus on three main aspects of environmental performance, namely climate change, environmental regulation, and product impact on the environment, which have the most data availability in the three-year post-deal period. We employ the same set of control variables in the regressions as in the previous panel. The test results illustrate that the pre-deal target-acquirer environmental gap’s marginal impact is strongest in the acquirer’s change in climate change performance, followed by environmental regulation. This finding aligns with the escalating public awareness of climate change issues, particularly in the wake of multiple occurrences of extreme weather disasters, alongside the tightening of environmental regulations globally. Consequently, firms are strongly motivated to seize every available opportunity, especially through significant corporate actions such as M&A deals. Such deals provide companies an opportunity to boost their environmental performance, thereby meeting the various regulatory requirements and addressing the heightened ESG expectations of their investors.

4.3 Social gap

We next explore the effects of deals on a company’s social performance. In Table 5 Panel A, we provide the results of the ordinary least squares regressions that assess the impact of the pre-deal target-acquirer relative social (S) gap on the acquirer’s subsequent change in social performance, measured over the 3–5 years post-deal completion. To ensure the robustness of our tests and isolate the marginal effect of the pre-deal social gap, we incorporate controls for relevant deal and firm characteristics as well as year and industry fixed effects across all regression models.

Panel A: Change in overall Social Performance
	(1)	(2)	(3)
	Δ S	Δ S	Δ S
	(−1 to +3)	(−1 to +4)	(−1 to +5)
Social_Gap	0.377***	0.471***	0.558***
	(0.000)	(0.000)	(0.000)
Observations	306	276	246
Adjusted R-squared	0.353	0.380	0.342
Constant	Yes	Yes	Yes
Firm controls	Yes	Yes	Yes
Deal controls	Yes	Yes	Yes
Industry FE	Yes	Yes	Yes
Year FE	Yes	Yes	Yes

Panel B: Change in Categorical Social Performance
	(1)	(2)	(3)	(4)
	Δ Social Subcategories (−1 to +3)
	Community	Human	Employee	Product
Social_Gap	0.140***	0.015	0.099**	0.122***
	(0.000)	(0.402)	(0.035)	(0.000)
Observations	306	306	306	306
Adjusted R-squared	0.076	0.104	0.283	0.283
Constant	Yes	Yes	Yes	Yes
Firm controls	Yes	Yes	Yes	Yes
Deal controls	Yes	Yes	Yes	Yes
Industry FE	Yes	Yes	Yes	Yes
Year FE	Yes	Yes	Yes	Yes

Table 5.

Change in post-deal social performance.

This table reports the ordinary least squares (OLS) regressions of the impact of the target-acquirer pre-deal social gap on post-deal acquirer change in social performance. The dependent variable is acquirer change in social scores from the year before announcement to 3-, 4-, and 5-years post-deal completion. Panel A presents the impact on the overall social performance. Panel B presents the impact on the major categorical social performance. The key independent variable of interest is the target-acquirer pre-deal social gap in the year before the announcement. We report p-values in parentheses. *, **, and *** denote statistical significance at the 10%, 5%, and 1% level, respectively.

The empirical findings, as presented in Panel A, consistently demonstrate positive coefficients on the pre-deal social gap, with strong significance at the 1% level across all three models over three to five years post-deal timeframes. According to the results from column (1), a one standard deviation increase in the pre-deal target-acquirer social gap is associated with a 0.70 increase in the acquirer’s social score change three years post deal. Given that the sample mean for the three-year post-deal change in the acquirer’s social score is 2.016, this represents a 34.5% increase in the acquirer’s Δ S (−1, +3) for an average deal in our sample. Therefore, the positive impact of the target-acquirer pre-deal social gap and the subsequent change in the acquirer’s social performance is both statistically and economically significant, providing strong evidence supporting our Hypothesis 2. This finding demonstrates the capability transfer and integration between the target and acquirer in the domain of social practices during the post-deal period.

We then proceed to conduct a detailed analysis of the subcategories within the social dimension to explore the aspects that contribute most significantly to such improvement in the company’s social performance. In Table 5 Panel B, we examine four main areas of social performance over the three-year post-deal period, namely community, human rights, employee relations, and product. To ensure consistency, we include the same set of control variables in the regressions as in the previous table panel. The test results show that the marginal impact of the pre-deal target-acquirer social gap strongly influences the acquirer’s improvement in product and employee relations. This suggests that acquirers prioritize managing employee relations during the integration stage to enhance employee satisfaction and job performance after deal completion. This finding aligns with the importance of integrating corporate cultures from the two previously separate entities in the post-deal stage. In addition, our findings indicate that acquirers utilize the social gap to improve their product performance, which includes aspects such as product quality, innovation, product safety, etc. Our results demonstrate that acquirers make deliberate efforts to boost their product performance to achieve operational gains and financial benefits for shareholders and customers in the post-deal stage. Moreover, a significant effect is observed in the community category, indicating that the learning and capability transfer of social practices through M&A integration generate positive externalities for the broader society and stakeholders.

4.4 Environmental and social total gap

Furthermore, we investigate the impact of M&A deals on the overall environmental and social (ES) performance by aggregating the two dimensions into a combined measure. Table 6 presents the ordinary least square regressions, examining the effect of the pre-deal target-acquirer environmental and social total gap on the acquirer’s subsequent post-deal change in its aggregate environmental and social performance. The dependent variable is the acquirer’s change in ES performance over the 3–5 years following deal completion relative to their pre-deal standard. To ensure the robustness of our analysis, we control for the relevant deal and firm characteristics in the tests and also include year and industry fixed effects across the models.

	(1)	(2)	(3)
	Δ ES	Δ ES	Δ ES
	(−1 to +3)	(−1 to +4)	(−1 to +5)
Environmental Social_Gap	0.295***	0.414***	0.463***
	0.000	0.000	0.000
Observations	306	276	246
Adjusted R-squared	0.328	0.404	0.402
Constant	Yes	Yes	Yes
Firm controls	Yes	Yes	Yes
Deal controls	Yes	Yes	Yes
Industry FE	Yes	Yes	Yes
Year FE	Yes	Yes	Yes

Table 6.

Change in overall environmental and social performance.

This table reports the ordinary least squares (OLS) regressions of the impact of the target-acquirer pre-deal environmental and social gap on post-deal acquirer change in overall environmental and social performance. The dependent variable is the acquirer change in environmental and social scores from the year before the announcement to 3, 4, and 5 years post-deal completion. The key independent variable of interest is the target-acquirer pre-deal environmental and social gap in the year before the announcement. We report p-values in parentheses. *, **, and *** denote statistical significance at the 10%, 5%, and 1% level, respectively.

Table 6 demonstrates that the test coefficients of the environmental and social gap are consistently positive, with a strong significance level of 1% across the models over three to five years post-deal windows. Based on the findings from column (1), a one standard deviation increase in the pre-deal target-acquirer environmental and social gap corresponds to a 0.71 increase in the acquirer’s ES score three years after the deal. Considering that the sample mean for the three-year post-deal change in the acquirer’s ES score is 2.492, this increase in the acquirer’s Δ ES (−1, +3) for an average deal in our sample amounts to 28.3% of the sample mean. Therefore, the positive impact of the target-acquirer pre-deal environmental and social gap on the subsequent change in the acquirer’s ES performance is both statistically and economically significant, thereby validating our test results from the previous sections.

Our findings offer important practical implications in the field of M&A integration. A pre-deal discrepancy in environmental and social performance between the target and acquirer indicates different strengths and weaknesses in their respective practices in these areas. This difference provides the acquirer with valuable opportunities to potentially learn from the target and incorporate its effective practices and resources into the merged business through post-deal integration. For instance, environmentally sustainable policies, such as waste management, previously implemented solely by the target, can now be extended and adopted across the combined business following the deal completion. Essentially, the pre-deal environmental and social gap represents an opportunity for the acquirer to boost its overall environmental and social performance after the deal.

The potential benefit of improving overall environmental and social performance could be a motivating factor behind the acquirer’s choice of target. Our research on the learning and capability transfer between firms engaged in M&A deals, stemming from the pre-deal disparity in target-acquirer capacities, builds upon the work of Wang and Xie [38], who explore the impact of capability transfer in the domain of corporate governance. Therefore, our study extends the scope of corporate social responsibility literature and illustrates that the learning benefit between targets and acquirers can be achieved through disparities in the wider ESG fields.

5. Conclusions

This study examines the impact of the corporate social responsibility gap in company acquisitions. We explore how disparities in environmental and social performance between target and acquirer firms affect the acquirer’s subsequent change in these dimensions in the post-deal stage. Our findings illustrate that a pre-deal gap in environmental and social performance between the target and acquirer positively impacts the acquirer’s performance in these fields after the deal. Our results support the learning theory of merger integration, demonstrating that the pre-deal environmental and social gap provides an opportunity for the capability transfer of those practices during the post-deal phase. This allows for the adoption and implementation of best practices from both sides across the combined business to achieve optimal performance.

In conclusion, our study contributes new insights to the corporate social responsibility literature and provides important implications for firms making major corporate investment decisions, such as M&A. Our empirical findings on learning and capability transfer in merger integration emphasize the importance of target selection and stakeholder orientation, and hence highlight the significance of actively improving corporate social responsibility in firms’ management.

In this research, the scope of the study is focused on the United States as the world’s largest capital market with the highest M&A deal volume for observations. For future work, the analysis could be extended to a global context, considering the different regional cultural, legal, and institutional frameworks. Hence, our study sheds light on future research to further investigate the relationship between corporate social responsibility and M&A in a broader context.