Corporate Restructuring and Environmental, Social, and Governance Improvement
- Publication Type:
- Thesis
- Issue Date:
- 2024
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This thesis comprises three studies that relate to the improvement of a company’s environmental, social, and governance (ESG) practices via corporate restructuring: Mergers and acquisitions (M&As) and spin-offs.
The first study examines an acquirer’s ESG improvement via M&As. I document that the relative ESG ratings of targets positively impact acquirers’ ESG improvements post-merger. Among the three components of an ESG rating, acquirers’ environmental rating displays the largest increase. In addition, acquiring targets across borders and in the same industry maximises acquirers’ ESG improvement post-merger. I also find that although acquirers pay higher bid premiums to targets with higher relative ESG ratings, those acquirers create additional value for shareholders by improving their financial performance post-merger. This study suggests that acquiring a better ESG target to transform a firm’s ESG practices serves as a sensible strategy.
The second study investigates if acquirers engage in M&As as a greenwashing activity to mislead the market. I propose a novel measure of the extent of greenwashing by using ESG controversies scores. I find that acquirers who engage in higher levels of greenwashing pre-merger acquire targets with higher relative ESG ratings and these deals are associated with lower announcement-period returns. I also document evidence of a decrease in the acquirers’ extent of greenwashing post-merger. These findings suggest that, although the market may initially be skeptical of the deals, acquirers eventually adopt more sustainable practices and make a genuine effort to “go green”.
The third study investigates whether a firm transforms its ESG performance via another corporate restructuring activity—spin-offs. I provide evidence that a firm’s socially responsible investing (SRI) fund ownership pre-spin-off positively impacts its ESG performance post-spin-off. The ESG proposals proposed by SRI funds function as a mechanism to facilitate such spin-offs. I also find that the relationship between SRI fund ownership pre-spin-off and corporate ESG performance post-spin-off is more pronounced when a firm faces larger financial constraints, has a lower ESG combined score pre-spin-off, and operates in an ESG-sensitive industry. Following ESG improvements post-spin-off, a firm’s SRI fund ownership increases significantly. These findings are significant as they indicate that spin-offs can be used as a strategy to improve ESG performance and attract more SRI capital.
Overall, these studies contribute to the understanding of corporate restructuring as an alternative strategy to improve a firm’s ESG practices, the market’s response to such deal announcements, and factors that maximise ESG improvement.
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