Market reaction to the effect of corporate social responsibility on mergers and acquisitions: Evidence on emerging markets

This cross-country study examines a large sample of 1986 merger and acquisition (M&A) deals in 23 emerging market (EM) countries between 2008 and 2014 to investigate market reactions to deal announcements regarding the acquiring firms with different levels of pre-merger corporate social responsibility (CSR) performance and under different degrees of agency cost concerns. We find that, neither positive stakeholder nor negative shareholder view alone can explain the CSR effects. The effects of CSR performance on market reactions to M&As depend mainly on the cost–benefit concerns of investors. While a higher level of acquirers’ pre-merger CSR performance could be helpful in conducting cross-border deals, market reactions to the CSR effects on such overseas deals still depend directly on the CSR cost concerns rather than indirectly on the CSR interests for deal efficiency. Evidence also shows that investors’ CSR cost concerns arise mainly from EM acquirers’ agency problems that could be effectively eased by country-level legal institutions rather than by firm-level governance mechanisms. Market investors with CSR agency concerns would not consider acquirers’ pre-merger CSR performance as a signal for investment during the deal announcement period, and that related CSR agency costs do impair the financial performance after the merger. Additionally, we confirm that the better governance quality of targets’ nations compared with that of acquirers’ nation is not valued by the market investors but significantly leads to the better long-term operating performance. Furthermore, we propose an argument disputing the conclusions of previous research that consider emerging countries collectively as examples of weak governance quality.