Effect of target firms’ ESG rating on bid premiums in M&A deals

Environmental, Social, and Governance (ESG) factors are reshaping the M&A landscape, but which elements truly drive deal value? As sustainability considerations gain prominence globally, the influence of ESG ratings on M&A transactions, particularly on bid premiums, remains an area of significant academic and practical interest. This study explores 413 global mergers and acquisitions, including 57 crucial deals from emerging markets captured by the BRICS economies, to uncover how ESG ratings impact bid premiums. Our analysis reveals a clear trend: strong governance scores are a significant independent driver of higher bid premiums, while overall ESG scores show a positive but non-significant relationship. This pattern holds true across both global and BRICS samples, stressing the important role of effective corporate governance, especially in dynamic emerging markets. Additionally, our results reveal that bid premiums have declined in the wake of the COVID-19 pandemic. These findings hold significant implications for key stakeholders in the M&A industry. Acquirers should prioritize a target firm’s governance processes and scores, recognizing that strong governance enhances long-term value and mitigates risk, while still considering the overall ESG score. For managers, strengthening governance practices will boost their firm’s attractiveness in M&A. Investors on the other hand, should scrutinize target firms’ governance metrics alongside broader ESG factors for informed decision-making. Finally, regulators are encouraged to advocate for improved ESG disclosures to facilitate better assessments and more sustainability-informed M&A transactions.