Corporate social responsibility and retail investor attention around M&A announcements

In recent years, corporate social responsibility (CSR) and its impact on firm value and investors’ decisions have gained popularity in finance research. Furthermore, high level of CSR has been found to explain high abnormal returns around M&A announcements, a type of event which is still an unresolved anomaly. Another stream of research that has gained popularity relates to investor attention and its impact on stock returns. Investor attention has also been detected to have a role in abnormal announcement returns. However, until this day, it has not been studied whether investor attention is driven by CSR and how they jointly influence merger announcement returns. This event study uses 86 public U.S. mergers conducted between the years 2010 and 2020 to investigate whether investor attention to a firm involved in a merger depends on the acquiror firm’s CSR level. Furthermore, it is examined if acquiror’s CSR level and investor attention have an impact on the abnormal announcement returns. Based on prior research, the used proxy for investor attention is Google search volume index which measures the search frequency of firm stock tickers around M&A announcements. In addition, the used proxy for acquiror firm’s CSR level is the ESG score retrieved from Thomson Reuters. Prior research suggests that high CSR firms should gain more investor attention since they seem to value sustainability and that both high CSR firms and firms that gain high investor attention should earn higher abnormal returns. Based on the results, investors pay more attention to high CSR acquirors in relation to low CSR acquirors. This is in line with prior research, suggesting that investors do not only take financial gains into account but also value sustainability in decision-making. However, high CSR acquirors or targets acquired by high CSR firms are not observed to gain higher returns compared to low CSR firms. When it comes to investor attention, high investor attention is discovered to result in higher abnormal returns for targets, which is consistent with prior research. The impact is observed to be opposite for acquirors. These findings of the mixed impact of investor attention on acquiror and target firm returns are interesting and require more research. All in all, however, these findings suggest that investor attention affects stock market reactions. Finally, investor attention is detected to be higher for targets than acquirors and the attention also persists comparably high on the days following M&A announcements, supporting some prior research indicating that retail investor attention is not immediate.