Nea Kajala 

Assessing the Influence of Target’s CSR on 
Acquisition Premiums in Europe 

An Examination of ESG Premiums 

 

 

 

 

 

 

 
  

Vaasa 2025 

School of Accounting and Finance 
Master’s Thesis in Finance 

Master’s Degree Programme in Finance  



2 

UNIVERSITY OF VAASA 
School of Accounting and Finance 
Author: Nea Kajala 
Title of the thesis:  Assessing the Influence of Target’s CSR on Acquisition Premiums in 

Europe : An Examination of ESG Premiums 
Degree: Master of Science in Economics and Business Administration 
Discipline: Master’s Degree Programme in Finance  
Supervisor: John Kihn  
Year: 2025 Pages: 116 

ABSTRACT :  
 
This thesis examines the relationship between the target’s acquisition premium and its pre-ac-
quisition CSR rating. The study’s objective is to investigate whether target firm’s CSR rating in-
fluences the target selection within the M&A process and if the sustainability performance is 
priced in within the valuation and bidding phase of the M&A transaction. Explicitly, the thesis 
aims to determine whether an ESG-based premium exists associated with target firms in Europe. 
Furthermore, the study investigates whether the impact of the target’s CSR is stronger in intra-
industry acquisitions.  
 
The theoretical framework of the study is built on key normative and descriptive theories con-
cerning the bidding and valuation of the target firm in the M&A setting. The study is based on a 
sample consisting of 424 European M&A transactions across 16 countries between the years 
2010 and 2024. The research methodology employs multivariate analysis to study the relation-
ship between the variables. Ordinary Least Squares regression is used to test the hypotheses by 
regressing the acquisition premium against the primary variable of interest, the target firm’s 
pre-acquisition CSR rating, and a set of deal- and firm-specific control variables. 
 
Consistent with previous literature, the study finds a positive and statistically significant rela-
tionship between the target’s pre-acquisition CSR rating and its acquisition premium. The find-
ings indicate that acquirers are willing to pay a premium for socially responsible target firms, 
providing evidence that CSR plays a role in M&A transactions. Furthermore, the study finds pos-
itive and statistically significant evidence that the impact of the target’s CSR on acquisition pre-
mium is more profound when the acquirer and target operate in the same industry. Therefore, 
it could be inferred that by acquiring a socially responsible competitor, the acquirer is provided 
with a direct opportunity to absorb and implement the “best practices” in sustainability and 
corporate responsibility. Moreover, the study finds both contradicting and statistically signifi-
cant results concerning the measurement window of the acquisition premium. The findings in-
dicate that the premium is greater when measured using a long window prior to the announce-
ment, while using a shorter window do not yield statistically significant results. The findings il-
lustrate that market timing matters. 
 
 
 
 
 
 

KEYWORDS: Acquisition premium, M&A, corporate social responsibility, CSR, ESG, corporate 
strategy. 

 



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VAASAN YLIOPISTO 
Laskentatoimen ja rahoituksen maisteriohjelma 
Tekijä: Nea Kajala 
Otsikko:  Assessing the Influence of Target’s CSR on Acquisition Premiums in 

Europe : An Examination of ESG Premiums 
Koulutus: Master of Science in Economics and Business Administration 
Maisteriohjelma: Master’s Degree Programme in Finance  
Ohjaaja: John Kihn  
Vuosi: 2025 Sivumäärä: 116 

TIIVISTELMÄ :  
 
Tämä tutkielma tarkastelee yrityskaupan kohteena olevan yrityksen hankintaa edeltävän 
yritysvastuun (CSR) ja sen hintapreemion välistä suhdetta. Tutkimuksen tavoitteena on selvittää, 
vaikuttaako kohdeyrityksen CSR-luokitus kohteen valintaan yrityskauppaprosessissa ja hinnoi-
tellaanko kohteen vastuullisuustoiminta yrityskaupan arvonmääritys- ja tarjousvaiheessa. 
Tutkielman tavoitteena on selvittää, kohdistuuko eurooppalaisiin kohdeyrityksiin ESG-pohjainen 
preemio. Lisäksi tarkastellaan, onko kohteen vastuullisuusvaikutus suurempi toimialan sisäisissä 
yritysostoissa.   
 
Tutkimuksen teoreettinen viitekehys rakentuu keskeisille teorioille, jotka koskevat 
kohdeyrityksen arvonmääritystä. Tutkimus perustuu otokseen, joka koostuu 424 euroop-
palaisesta yrityskaupasta 16 maassa vuosina 2010–2024. Tutkimusmenetelmä käyttää moni-
muuttuja-analyysiä muuttujien välisen suhteen tutkimiseen. OLS-regressiota (Ordinary Least 
Squares) käytetään hypoteesien testaamiseen mittaamalla hintapreemion ja kohdeyrityksen 
hankintaa edeltävän CSR-arvion suhdetta, sekä hyödynnetään useita kauppa- ja yrityskohtaisia 
kontrollimuuttujia.  
 
Tulokset osoittavat, että kohteen CSR-suorituskyvyllä on positiivinen ja tilastollisesti merkittävä 
suhde hintapreemioon. Tulokset osoittavat, että ostajayritykset ovat valmiita maksamaan 
preemion sosiaalisesti vastuullisista kohdeyrityksistä, mikä osoittaa, että yritysten yhteiskunta-
vastuulla on merkitystä yrityskauppatilanteissa. Lisäksi tutkimuksen tulokset osoittavat, että 
kohteen vastuullisuudella on suurempi merkitys preemioon, kun ostaja ja kohde toimivat sa-
malla toimialalla. Näin ollen voidaan päätellä, että ostamalla sosiaalisesti vastuullisen kilpailijan, 
ostajalle saa suoran mahdollisuuden omaksua kestävän kehityksen ja yritysvastuun parhaat 
käytännöt. Lisäksi tutkimuksen tulokset osoittavat ristiriitaisia sekä tilastollisesti merkitseviä 
tuloksia hankintapreemion mittaustavasta. Tulokset osoittavat, että hintapreemio on suurempi, 
kun se mitataan pitkällä ikkunalla ennen yrityskaupan julkista ilmoitusta, kun taas lyhyemmällä 
ikkunalla mitattuna preemio ei tuottanut tilastollisesti merkitseviä tuloksia. Tulokset osoittavat, 
että markkinoiden ajoituksella on merkitystä yrityskauppatilanteissa.   
 
 
 
 
 
 

AVAINSANAT: Yrityskaupat, yrityksen arvonmääritys, yritysvastuu, yhteiskuntavastuu, kes-
tävä liiketoiminta, yritysstrategiat. 

  



4 

Contents  

1 Introduction 8 

1.1 Purpose of the study 10 

1.2 Hypotheses 11 

1.3 Structure of the study 13 

2 Corporate Social Responsibility (CSR) 14 

2.1 Understanding CSR 15 

2.1.1 CSR ratings 17 

2.1.2 CSR in Europe 19 

2.2 CSR and firm value 22 

3 Acquisition Premiums 26 

3.1 Understanding acquisitions 26 

3.1.1 Types of M&A transactions 28 

3.1.2 M&A process 29 

3.1.3 M&A in Europe 32 

3.2 Acquisition rationale 35 

3.3 Acquisition premium causes 37 

4 Literature Review 41 

4.1 Empirical evidence on the impact of CSR on M&A outcomes 41 

4.2 Empirical evidence of target’s CSR on acquisition premium 45 

4.2.1 Positive relationship 46 

4.2.2 No significant relationship 49 

5 Theoretical Framework 50 

5.1 Normative financial theories 51 

5.1.1 Shareholder theory 51 

5.1.2 Stakeholder theory 51 

5.2 Descriptive financial theories 54 

5.2.1 Information asymmetry 54 

5.2.2 Signalling theory 56 



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5.2.3 Agency theory 58 

5.2.4 Winner’s curse 59 

5.3 Discussion 60 

6 Data & Methodology 62 

6.1 Data description 62 

6.2 Data construction 64 

6.3 Final data sample 65 

6.4 Variables 73 

6.4.1 Dependent variable 73 

6.4.2 Independent variable 74 

6.4.3 Control variables 76 

6.4.4 Model estimation 79 

7 Empirical Findings 81 

7.1 Descriptive statistics 81 

7.2 Empirical results 88 

7.3 Endogeneity and robustness testing 93 

8 Conclusions 96 

References 101 

Appendices 113 

Appendix 1. Variable Correlation Matrices 113 

Appendix 2. Variance Inflation Factors 114 

Appendix 3. 2SLS Results 115 

Appendix 4. Additional Analysis 116 

  



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Figures  
 
Figure 1. United Nation’s Sustainable Development Goals (United Nations, n.d.). 17 

Figure 2. Environmental targets of the EU Taxonomy (European Commission, 2019). 20 

Figure 3. Worldwide M&A transactions 1990-2023 (IMAA, n.d.). 27 

Figure 4. Pre-deal M&A process (Welch et al., 2020, p. 844) 30 

Figure 5. M&A transactions in Europe 1990-2023 (IMAA, n.d.). 33 

Figure 6. M&A transactions in the final data sample. 68 

Figure 7. Number of transactions in the final data sample. 69 

Figure 8. Average acquisition premiums in the final data sample. 70 

Figure 9. The average ratio of target market value and acquisition premium -105 days 

before M&A announcement. 70 

Figure 10. Acquisition premium by industry in the final data sample -105 days before 

M&A announcement. 71 

Figure 11. Average acquisition premiums in the final data sample by country. 72 

Figure 12. LSEG ESG score evaluation parameters (LSEG, 2023, p. 9). 75 

 
 
Tables 
 
Table 1. Factors impacting acquisition premium. 38 

Table 2. Summary of prior literature on CSR on M&A outcomes. 41 

Table 3. Summary of prior literature on acquisition premiums and target’s CSR rating.

 46 

Table 4. Flow of signalling in M&A transaction impacting acquisition premium. 57 

Table 5. Sample distributions. 66 

Table 6. Control variables. 77 

Table 7. Acquisition premium -42, -63, and -105 days prior to announcement. 82 

Table 8. Descriptive statistics. 83 

Table 9. Acquisition premiums for sub-samples. 85 

Table 10. Correlation matrix acquisition premium -105 prior to announcement. 86 

Table 11. Baseline regression results. 89 



7 

Table 12. OLS regression results with the interaction term. 92 

Table 13. 2SLS regression results. 94 

 
 
Abbreviations  
 
2SLS 2-Stage Least Squares  
CSP Corporate Social Performance 
CSR Corporate Social Responsibility 
ESG Environmental, Social, and Governance 
M&A Mergers and Acquisitions 
OLS Ordinary Least Squares 
SRI Socially Responsible Investing / Socially Responsible Investment 
 
 
 
  



8 

1 Introduction 

Corporate social responsibility (CSR) has become a strategic focus for organizations 

across industries. CSR comprises the firm’s dedication to acting ethically and responsibly, 

lowering its environmental impact, and improving the quality of life of its employees and 

the community. Similarly, the number of mergers and acquisitions (M&A) has increased. 

M&As are important in corporate strategy as they enable firms to expand, restructure, 

and diversify their operations. M&As are significant transactions that can either generate 

or eliminate shareholder value (Cumming et al., 2023, p. 1465). 

 

One critical factor in M&A transactions is the acquisition premium, which represents the 

additional amount paid for a target firm beyond its market value. Companies are willing 

to pay premiums for targets to combine resources to obtain competitive advantage and 

extend their market presence. However, acquisition premiums can vary substantially be-

tween firms and industries. As acquirers tend to overpay for targets, high acquisition 

premium impacts the post-merger financial performance of the acquirer, sometimes 

even leading to financial distress or even bankruptcy (Haunschild, 1994, p. 393). Thus, 

acquisition premiums are interesting to study as they have a considerable impact on the 

successful completion of the transaction. 

 

Incorporating CSR factors into M&A decisions is consistent with the changing expecta-

tions of stakeholders such as investors, consumers, employees, and legislators. As the 

awareness of environmental, social, and governance (ESG) impact has increased, firms 

try to incorporate CSR principles into their strategy to become more sustainable and 

avoid reputational risk. El Ghoul et al. (2011, p. 2388) note that more than half of the 

Fortune 1000 firms in the United States disclose their CSR performance as large institu-

tional investors screen for firms that integrate socially responsible activities into their 

operations. Therefore, examining how CSR practices impact firm valuations through ac-

quisition premiums can provide insights into the extent to which ethical and social per-

formance influences financial results in M&A deals. 

 



9 

Empirical studies indicate that investors and market participants are increasingly aware 

of the importance of CSR variables in determining corporate value and risk. Studies have 

shown that firms with strong CSR have decreased firm-specific risk (Albuquerque et al., 

2019) and reduced stakeholder risk (Becchetti et al., 2015). Moreover, Ferrell et al. (2016) 

find a positive relationship between CSR and firm value, indicated by high Tobin’s q. High 

CSR rating is linked to increased profitability, growth rates, and sales compared to low-

CSR firms (Lins et al., 2017). Firms engaged in CSR activities have lower cost of equity 

capital (Chava, 2014; Ghoul et al., 2011) and fewer agency problems (Ferrell et al., 2016). 

Furthermore, firms with strong CSR-rating tend to have higher resilience to market 

shocks (Lins et al., 2017). CSR is not linked only to improved financial ratios, as Edmans 

(2012) found that firms that scored high in providing a better workplace for employees 

had higher stock returns than their peers.  

 

According to prior research, the target firm’s CSR has become a key acquisition rationale. 

Qiao and Wu (2019, p. 1) argue that the target’s CSR rating influences the target selection 

within the M&A process. They present an example of Unilever’s rationale for acquiring 

Ben and Jerry’s to gain knowledge on creating and executing socially responsible initia-

tives. They argue that CSR is essential in the initial stages of the M&A process because 

firms are likely to acquire socially responsible firms to gain capabilities related to sus-

tainability. Similarly, Ozdemir et al. (2022, p. 1005) find that the target’s CSR rating sig-

nificantly impacts the transaction valuation. They state that strategic acquirers, reported 

in PwC study in 2012, incorporate positive CSR performance into target valuation, while 

poor CSR performance is used as a leverage to negotiate a lower offer price.  

 

The topic of CSR and acquisition premiums contributes to the prior literature in the fol-

lowing ways. First, the study aims to find evidence of whether investments in CSR gen-

erate financial returns or if they are an expense, as described in shareholder theory. Sec-

ond, as the study focuses solely on the target’s role in acquisitions, as opposed to the 

acquirer’s view on prior research, the study aims to find more evidence on targets’ sus-



10 

tainability efforts driving value creation. Finally, if CSR impacts the valuation of a com-

pany, it could provide a financial motive for investors and firm owners to include sustain-

ability in their business operations or investment strategy. 

 

1.1 Purpose of the study 

The purpose of this study is to examine the relationship between the target’s acquisition 

premium and its pre-acquisition CSR ratings. Explicitly, the thesis aims to determine 

whether an ESG-based premium exists associated with target firms in Europe. This would 

imply that target firms with high pre-acquisition CSR ratings command a premium in ac-

quisition transactions.  

 

The rationale for the study is the current research gap in the prior literature. The target's 

perspective of the possible influence of CSR on acquisition premiums has not yet been 

examined by prior research, despite thoroughly examining the acquirer's point of view, 

and the value creation potential of ESG practices. By addressing this research gap, the 

study aims to contribute to an understanding of how CSR and firm valuation relate in the 

context of M&A.  

 

Furthermore, the study examines the acquisition premiums in Europe, which provides 

further novelty to the topic. The majority of the studies have been clustered around the 

United States and China. North-Western Europe is a compelling target for the study due 

to its strong commitment to sustainability and the extensive adoption of sustainable 

practices across the continent. As Al Ani et al. (2024, pp. 656-657) state, European Union 

countries have actively promoted policies to reduce environmental impact, such as low-

ering greenhouse gas emissions and promoting sustainable consumption. They state 

that consumer preferences represent an institutional commitment, incentivising firms 

to adopt sustainable practices. Moreover, the EU has shown a high degree of innovation 

as measured by the Eco-Innovation index (Al Ani et al., 2024, pp. 656-657). Given the 

limited studies between CSR and M&A in Europe, despite the region’s advocacy for CSR 

and Socially Responsible Investing (SRI), it is particularly interesting to focus on Europe.  



11 

   

The relationship between CSR and acquisition premiums is compelling for various factors. 

Whereas the existing literature on CSR and its impact on financial performance has a 

wide range of findings, numerous literature points to the positive impact of CSR activities 

on a company's financial performance (Ozdemir et al., 2022). Based on the stakeholder 

theory, it is found that organizations that display transparency and establish stakeholder 

relations are more likely to benefit from lower firm-specific risk (Godfrey et al., 2009). 

This may result in increased acquisition premiums for targets with strong CSR perfor-

mance. While acquisitions are inherently uncertain due to information asymmetry, com-

panies with strong CSR practices may reduce uncertainty, potentially leading to greater 

acquisition premiums (Ozdemir et al., 2022). This thesis seeks to gain more evidence on 

this connection.  

 

1.2 Hypotheses 

The thesis aims to determine whether target the firm’s pre-acquisition ESG rating has an 

impact on the acquisition premium during the M&A transaction. The hypothesis is based 

on prior studies on the topic (Gomes & Marsat, 2018; Qiao & Wu, 2019; Cho et al., 2021; 

Li et al., 2021; Ozdemir et al., 2022; Liu et al., 2023). Most of these studies are based on 

target firms in the United States or China. This thesis studies whether the relationship 

between pre-acquisition CSR score and acquisition premium exists in Europe. The hy-

pothesis is as follows:  

 

H1: The pre-acquisition CSR score of the target firm has a positive relationship with 

its acquisition premium. 

 

Moreover, to test whether the measurement period impacts the results, the acquisition 

premium is measured using short- and long-term windows before the announcement. 

The second hypothesis is as follows: 

 



12 

H2: The relationship between the target firm’s pre-acquisition CSR score and its 

acquisition premium is the same whether measured over a short-term window 

(specifically, -42 trading days) or a long-term window (specifically, -105 trading 

days) prior to the announcement. 

 

If the first and second hypotheses hold, the purpose is to test whether the target’s pre-

acquisition CSR score’s impact on the premium is more profound in horizontal acquisi-

tions, where the acquirer and target operate within the same industry. Prior literature 

has found evidence that firms are likely to acquire similar firms (Hillman et al., 2009, p. 

1405). Haleblian et al. (2009, pp. 472-473) argue that it is caused by firms acquiring their 

direct competitors to gain monopolistic advantages. However, the European Commission 

regulates horizontal mergers and prohibits transactions if they cause competitive harm 

in the market (Bartalevich, 2020, p. 383). Therefore, it is interesting to see to which ex-

tent the M&A transactions in the sample include firms operating in the same industry, 

how the competition impacts the acquisition premium, and if the target’s CSR rating has 

an impact on the premium. The third hypothesis is the following: 

 

H3: Target’s pre-acquisition CSR rating has a greater impact on the acquisition pre-

mium when the target and acquirer operate within the same industry. 

 

The third hypothesis aligns with the resource-based view, which suggests that CSR activ-

ities can create a competitive advantage (Qiao & Wu, 2019, p. 3). In this context, the 

acquirer may seek to transfer the target’s CSR-related capabilities through the acquisi-

tion as a form of organisational learning. The transfer may, in turn, increase the acquisi-

tion premium compared to cross-industry acquisitions. Of course, this is speculation, and 

to the extent possible, this study will try to contribute to enhancing the probability of 

whether European firms involved with M&A during the sample period appear more fo-

cused on reducing competition and/or enhancing organisational learning. 

 



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1.3 Structure of the study 

The thesis is structured in the following way: The second chapter outlines the concept 

of CSR, provides definition, and explains how CSR affects firm value. Chapter three pro-

vides a rationale as to why acquisitions are conducted and what causes acquisition pre-

miums. The fourth chapter outlines a more in-depth literature review on the topic. The 

fifth chapter covers the theoretical framework, including key theories that impact the 

valuation and bidding in M&A transactions. The sixth chapter presents the data, chosen 

methodology, and variables. Chapter seven outlines the empirical findings, and the final 

chapter concludes the thesis and discusses the contribution of the study and future re-

search suggestions, and practical recommendations for investors and M&A agents.  



14 

2 Corporate Social Responsibility (CSR) 

According to Alshehhi et al. (2018, p. 1) sustainability means addressing today's needs 

without jeopardizing the ability of future generations to meet theirs. In a corporate con-

text, sustainability involves broadening the focus from purely financial outcomes to also 

include environmental and social factors (Alshehhi et al., 2018, p. 1). Various terms re-

lated to sustainability and CSR are defined within this chapter. 

 

CSR embodies the concept that companies have social responsibilities beyond generat-

ing profits through producing goods and services (Hill et al., 2006, p. 166). McWilliams 

and Siegel (2001, pp. 117-118) define CSR as actions promoting social welfare exceeding 

the company’s own interests, industry norms, and legal obligations. CSR involves com-

panies integrating social and environmental considerations into their operations and 

stakeholder interactions. CSR shows a company’s ethical conduct by promoting eco-

nomic growth and improving the welfare of workers, the community, and society at large 

(McWilliams & Siegel, 2001, pp. 117-118).  

 

Viswanathan et al. (2019, p. 339) extend the definition of strategic CSR as socially re-

sponsible activities that simultaneously improve the financial performance of the firm 

through either promoting its reputation, strengthening the exchange between stake-

holders, reducing unsystematic risk, and/or boosting innovation. Strategic CSR differs 

from general CSR as a concept by focusing solely on activities that improve corporate 

financial performance, excluding activities that benefit society but do not directly add 

value to the firm, thus distinguishing it from broader, ethically driven CSR (Viswanathan 

et al., 2019, p. 339). 

 

ESG measures a firm’s performance across three sustainability areas (Galbreath, 2013, p. 

530). Studies on sustainability tend to use the terms CSR and ESG as synonyms. While 

CSR refers to a firm’s commitment to conduct business in a responsible manner, ESG 

extends the concept into a framework integrating the three major dimensions and serves 



15 

as an international measuring standard for each (Jiang et al., 2024, p. 4694).  ESG in-

cludes a wide range of topics related to environmental concerns, such as climate change, 

social responsibility, such as human rights, and corporate governance, such as independ-

ence of board members and remuneration (Galbreath, 2013, p. 530). 

 

Corporate social performance (CSP), according to Perrini et al. (2012, p. 59), is defined 

as the outcome of carrying out CSR activities and behaviours, which include social re-

sponsibility policies associated with a company’s interaction with its stakeholders. There-

fore, CSP is an extension of CSR that concentrates on results as opposed to the broad 

concept of a company’s responsibility to society (Perrini et al., 2012, p. 59).   

 

Socially responsible investing (SRI) connects achieving financial returns while fulfilling 

CSR objectives. SRI involves integrating ESG considerations into investment decisions and 

active ownership. (PRI, 2021.) Thus, SRI combines the needs of stakeholders with share-

holder interests (Steurer et al., 2012, p. 212). 

 

2.1 Understanding CSR 

As stakeholders have become more aware of CSR, firms have increased their efforts to 

demonstrate sustainable behaviour. The increase in the firm’s CSR activities arises from 

either voluntary efforts or pressure from its stakeholders (McWilliams & Siegel, 2001, pp. 

119-120). Wu and Shen (2013, p. 3530) extend this and state that three main motives 

for CSR activities include “altruism, strategic choices, and greenwashing”. The altruistic 

motive shows that firms engage in CSR for their benefit, such as philanthropy (Wu & 

Shen, 2013, p. 3530). When CSR is viewed strategically, CSR is driven by management’s 

vision and values, not seen as a cost but rather as a tool to differentiate themselves from 

their competition (Fatima & Elbanna, 2023, p. 105). Today, the strategic motive is pri-

marily considered the driver for firms engaging in CSR activities (Fatima & Elbanna, 2023, 

p. 105; Wu & Shen, 2013, p. 3540).  

 



16 

As firms employ CSR communication as part of their sustainability strategy to improve 

their brand, greenwashing can deceive customers and limit the effectiveness of legiti-

mate CSR activities (Parguel et al., 2011, p. 15). According to Parguel et al. (2011, p. 16), 

greenwashing refers to deceiving customers about a firm’s sustainability activities or the 

advantages of its products and services. If a company’s reputation suffers due to uneth-

ical behavior or poor sustainability activities, it may lose its customers, employees, and 

community support for its operations (McWilliams & Siegel, 2001, pp. 119-120). Parguel 

et al. (2011, p. 24) find that firms with poor sustainability activities negatively impact 

their corporate brand image. 

 

McWilliams and Siegel (2001, pp. 119-120) argue that firms employ CSR in their strategy 

due to demand from two sources: consumers and other stakeholders, including share-

holders, personnel, and community. They argue that consumer demand rises from the 

perception that purchasing products with sustainable attributes, such as not-tested-on-

animals labels, enables consumers to support issues they care about while profiting from 

firms that invest in CSR. Hill et al. (2006, p. 166) state that CSR acts as a differentiation 

strategy for companies, distinguishing them from competitors. Demand for CSR from 

other stakeholders rises from firms’ need to attract and maintain skilled employees, and 

governmental pressure to support sustainable activities (McWilliams & Siegel, 2001, pp. 

119-120). 

 

Although management deems engaging in CSR redundant, firms may be forced to un-

dertake it due to external pressure from legislation. Governments have established initi-

atives to promote corporate sustainability and direct funds to more sustainable firms 

(Drempetic et al., 2020, p. 336). One government effort is Agenda 2030 for Sustainable 

Development, which involves the public and commercial sectors meeting the Sustaina-

ble Development Goals (SDGs) through defined targets. By including SDGs in strategy 

and business modes, firms can impact on global concerns. (Pizzi et al., 2022, p. 87.) The 

SDGs are illustrated in Figure 1. 



17 

 

Figure 1. United Nation’s Sustainable Development Goals (United Nations, n.d.). 

 

As firms devote more resources to strategic CSR, there is a growing emphasis on under-

standing how to effectively execute sustainability strategies. According to Fatima and El-

banna (2023, p. 106), implementing a CSR strategy includes employing a systematic ap-

proach to raise awareness of sustainability concerns and incorporating those values into 

the firm’s operations. The four elements of the CSR process involve organizational aware-

ness of CSR, communicating CSR initiatives and performance both inside and outside the 

firm, incorporating CSR into firm strategy by establishing CSR policies, as well as regular 

monitoring of CSR targets and compliance (Fatima & Elbanna, 2023, p. 106). 

 

2.1.1 CSR ratings 

According to Tampakoudis et al. (2021, p. 1119) the ESG score is a prominent proxy for 

assessing CSR rating, as it addresses the complexity of quantifying corporate sustainabil-

ity. It is commonly used in CSR literature (Krishnamurti et al., 2020; Tampakoudis et al. 

2021). Therefore, this study uses ESG scores to measure CSR performance from LSEG 

database (formerly known as Refinitiv and Thomson Reuters).  Refinitiv ESG as a data-

base has received nearly 1.500 academic citations (Berg et al., 2020, p. 7).  

 



18 

ESG rating is an assessment of an entity’s impact on or exposure to environmental, social, 

and governance issues. The rating is given using a specific grading methodology to meas-

ure the entity’s compliance with international climate agreements or sustainability 

standards. ESG ratings or scores are often grouped into two categories: ESG risk ratings 

and ESG impact ratings. ESG risk ratings assess an entity’s exposure to ESG risks, while 

ESG impact ratings assess its impact on ESG variables. (Mazzacurati et al., 2021, p. 106.) 

 

ESG ratings are assessed by third-party, independent rating agencies. Examples of such 

agencies include MSCI, Sustainalytics, S&P, Refinitiv, Moody’s, ECPI, and Bloomberg. Data 

for the ESG rating is obtained from public sources, including annual reports and company 

news. Moreover, some rating agencies obtain data from entities themselves via ques-

tionnaires or interviews. Other agencies collect data from third parties and public data-

bases. (Mazzacurati et al., 2021, pp. 106-108.) 

 

The ESG performance assessment combines three pillars – E, S, and G – into a single 

score (Mazzacurati et al., 2021, p. 106). Ratings follow the same dimensions but differ in 

methodology and scoring (Elbasha & Avetisyan, 2018, p. 43). According to the authors, 

ESG providers in the United States prefer the screening approach, excluding firms that 

participate in controversial industries (such as tobacco), while European providers prefer 

the best-in-class approach. Different rating providers may assign varying weights to 

these pillars based on the materiality of the issue, potentially resulting in subjective rat-

ings that are difficult to compare (Mazzacurati et al., 2021, p. 106). Elbasha and Avetisyan 

(2018, p. 43) reference a study showing that the U.S.-based ESG rating provider KLD as-

signs 71 percent of its pillar weight to social issues, whereas the Europe-based agency 

Asset4 assigns only 47 percent weight to social issues. Moreover, the evaluation criteria 

for rating CSR performance are regularly updated to reflect new issues or irrelevant cri-

teria deleted (Elbasha & Avetisyan, 2018, p. 43). 

 

The main criticism of ESG ratings arises from the reliability and lack of consistency be-

tween the ratings from ESG-rating agencies (Mazzacurati et al., 2021, p. 109). Boffo et al. 



19 

(2020, pp. 14-15) find that firms that receive higher E-scores do not result in lower envi-

ronmental impact, with a positive relationship between overall CO2 emission and high E 

scores. They examine E-scores from prominent rating agencies such as Thomson Reuters, 

MSCI, and Bloomberg, which reveal the varying methodologies used by the agencies. 

Moreover, they show that firms that generate dangerous waste may have higher E-scores 

contingent on the data source (Boffo et al., 2020, pp. 14-15). These concerns about lack 

of transparency and clarity on ESG ratings are considered in the European Union’s Tax-

onomy for Sustainable Activities (European Commission, 2023). 

 

2.1.2 CSR in Europe 

According to Steurer et al. (2012, pp. 206-207), the implementation of CSR  varies greatly 

across different European regions despite the widely accepted concept of CSR. This var-

iation can be attributed to the corporate environment, including stakeholder require-

ments, which vary across countries. CSR policies established by governments include 

raising awareness of CSR, enhancing the transparency of CSR reporting, promoting SRI, 

and offering incentives (Steurer et al., 2012, p. 209).  

 

According to Steurer et al. (2012, p. 206), Western European governments are far more 

engaged in supporting CSR than those in Central and Eastern Europe. They argue that 

governmental initiatives on CSR enhance rather than reduce the European CSR gap, re-

flecting disparities in the adoption of CSR in Europe. The findings by Steurer et al. (2012, 

p. 206) are supported by Pizzi et al. (2022, p. 98), who find that Scandinavian companies 

are reporting on CSR more than other European companies.  

 

Sustainability reporting in Europe made a significant advancement when the EU Di-

rective 2014/95 took place, requiring European companies to report non-financial infor-

mation on their ESG activities (Mio et al., 2021, p. 1591). The Non-Financial Reporting 

Directive (NFRD) was prompted by the need to bridge the information gap between com-

panies and stakeholders (Pizzi et al., 2022, p. 85). Mio et al. (2021, p. 1602) found that 

the NFRD significantly improved the quality and quantity of non-financial reporting in 



20 

2017 after the Directive took place compared to 2016. Moreover, they find evidence that 

firms disclosure of non-financial information to demonstrate their commitment towards 

sustainability, thus supporting the signalling theory.  

 

A more recent ESG initiative in Europe is the European Union’s Taxonomy for Sustainable 

Activities. The Taxonomy is included in the European Union’s sustainable finance frame-

work that supports firms and the financial sector in transitioning to a sustainable future 

by facilitating funding for sustainable projects (European Commission, 2023). The Taxon-

omy connects the reporting obligations of the Corporate Sustainability Reporting Di-

rective (CSRD) succeeding the NFRD, along with the Sustainable Finance Disclosure Reg-

ulation (SFDR) by categorising ecologically friendly economic activities (Hummel & Bau-

ernhofer, 2024, p. 2). The Taxonomy promotes the recognition of economic activities in 

relation to six environmental targets illustrated in Figure 2. CSRD applies to large and 

publicly traded firms, while SFDR sets out disclosures of financial products for issuers 

(Hummel & Bauernhofer, 2024, pp. 4-5).  

 

 

Figure 2. Environmental targets of the EU Taxonomy (European Commission, 2019). 

 

As stated in the Taxonomy regulation, to be considered environmentally sustainable, the 

activity must meet three conditions. First, the activity has to support significantly achiev-



21 

ing at least one of the six environmental targets, illustrated in Figure 2. Second, the ac-

tivity cannot substantially damage any of the targets. Finally, the activity must be per-

formed with minimum precautions. (Hummel & Bauernhofer, 2024, p. 4.) 

 

According to Lucarelli et al. (2023, p. 2), capital markets may only be referred to as “sus-

tainable” when invested funds are directed towards companies that follow the EU Tax-

onomy’s industry-specific environmental requirements. They state that Taxonomy in-

tends to promote firms to improve their sustainability profiles, assuring their continued 

eligibility for funding (Lucarelli et al., 2023, p. 2).  

 

The Taxonomy is implemented in stages. Nonfinancial companies must report their eli-

gibility for climate change mitigation and adaptation initiatives from 1.1.2022, covering 

the financial year 2021. The second phase begins 1.1.2023, as companies must report 

their eligibility and alignment for the financial year 2022 onwards. The third phase ex-

pands the disclosure requirements to include all six environmental targets. (Hummel & 

Bauernhofer, 2024, pp. 4-5). 

 

According to the European Commission (2024), in 2023, 600 European companies in-

vested in projects aligned with the EU Taxonomy, amounting to a total of 191 billion eu-

ros. The Commission reports that companies with high levels of Taxonomy-aligned dis-

closures have consistently outperformed the stock market in recent years. They continue 

by stating that the majority of green bonds are issued in Europe, highlighting the role of 

Europe in advancing towards a sustainable future. Lucarelli et al. (2023, p. 2) find that 

the EU Taxonomy itself did not increase investment between eligible companies; rather, 

company size and confusion regarding eligibility have an impact on investment decisions. 

These findings demonstrate the viability of the European Commission’s policy to encour-

age sustainable investments (Lucarelli et al., 2023, p. 2).  

 



22 

2.2 CSR and firm value 

As briefly noted, many scholars have investigated whether and how CSR initiatives in-

crease profitability of a firm or if they come at a cost. To explore the perspectives on this 

matter, two primary viewpoints are examined. In literature, the shareholder expense 

view and the stakeholder value maximization view are the two competing perspectives 

on CSR. The perspective of stakeholder value maximization states that CSR initiatives 

boost shareholder wealth because they make stakeholders more inclined to support a 

company's operations (Deng et al., 2013, p. 88). The shareholder expense view, in con-

trast to the stakeholder value maximization view, views that the management partici-

pates in CSR activities to support various stakeholders at the expense of the firm’s share-

holders (Deng et al., 2013, p. 89). These perspectives are defined in detail in the theo-

retical framework chapter.  

 

According to Alshehhi et al. (2018, pp. 16-17), the prior literature indicates a strong pos-

itive correlation between firm financial performance and sustainability initiatives. They 

studied 132 articles related to CSR and firm performance from pre-2002 until 2017. A 

few studies have found a negative, mixed, or no significant correlation between financial 

performance and sustainability (Alshehhi et al., 2018, pp. 16-17). 

 

Deng et al. (2023, pp. 89-90) show that during merger announcements, acquirers with 

high CSR-rating have a positive impact on the wealth of other stakeholders of the firm, 

including employees and suppliers, as well as the bondholders of the acquirer. Further-

more, employees of merged firms risk fewer layoffs in mergers with high CSR acquirers 

compared to those with low CSR-rating. These findings indicate that firms with higher 

CSR scores participate in transactions that benefit various stakeholders, thus supporting 

the stakeholder value maximisation perspective (Deng et al., 2013, pp. 89-90). 

 

The relationship between CSR rating and a firm’s cost of capital has been examined from 

the perspective of the cost of debt and equity. Cheng et al. (2014, pp. 1-3) find that firms 

with high CSR ratings have easier access to financing. They argue that capital limitations, 



23 

such as factors blocking a firm from funding its investments, are lowered by improved 

stakeholder participation and transparency. When assessing the elements of CSR-rating 

separately, they discover that its effect is influenced by social and environmental varia-

bles. Their sample includes 2.439 globally listed firms from 2002 to 2009.  

 

El Ghoul et al.’s (2011, p.2388) findings may explain the results of Cheng et al.’s (2014, 

pp. 1-3). They find that firms with higher CSR ratings have lower cost of equity capital. 

Moreover, they find that firms active in so called “sin” industries exhibit higher cost of 

equity. As the cost of equity acts as a discount rate for estimating a firm’s market value 

based on future cash flows, El Ghoul et al.’s (2011, p. 2388) study suggests that firms 

with strong CSR-rating receive higher valuations and reduced risk. Their sample consists 

of 12.915 observations of U.S. -based firms from 1992 to 2007. 

 

Giese et al. (2019, p. 69) study the link between ESG-rating and firm valuation. They find 

that ESG has a positive impact on both company valuation and performance. More spe-

cifically, ESG results in lower cost of capital in CAPM and thus higher valuations, as well 

as improved profitability and less exposure to tail risks. The authors examine the rela-

tionship through a DCF model and utilize MSCI ESG Rating data from 1600 firms during 

2007-2017. (Giese et al., 2019, p. 69.) 

 

Godfrey et al. (2008, p. 426) extend the topic of valuations and examine whether firms 

can conserve their  value through CSR activities. They find that firms benefit from a form 

of insurance-like protection when they engage in CSR activities. This implies that in case 

of a negative event, firms with high participation in CSR activities lead to smaller market 

movement in the firm’s stock price (Godfrey et al., 2009, p. 441).  

 

Godfrey et al. (2008) findings are supported by Albuquerque et al. (2020, p. 593), who 

examine ESG rating as a resilience factor amidst times of economic uncertainty. They find 

that during the COVID-19 pandemic, firms with higher environmental and social ratings 

experienced higher stock returns than those with low ratings. Moreover, they document 



24 

that firms with higher ratings had decreased daily volatility of the returns compared to 

other firms. Albuquerque et al. (2020, p. 600) sample consists of daily stock returns of 

2.171 firms in the United States for the first quarter of 2020. They exclude the govern-

ance rating to capture the effect of environmental and social effects as, based on prior 

literature, corporate governance may be a plausible driver for abnormal returns (Albu-

querque et al., 2020, p. 598). 

 

On the other hand, the shareholder expense view is supported by prior studies. Espe-

cially the positive connection between CEO entrenchment strategies and CSR practices 

is documented in the literature. Surroca and Tribó (2008, pp. 784-786) find that manager 

entrenchment is positively connected to CSP and worker satisfaction. This implies that 

managers use CSR initiatives to maintain their positions. When managers establish CSR 

initiatives in response to stringent governance rules, financial performance suffers, lead-

ing to worsened shareholder value (Surroca & Tribó, 2008, pp. 784-786). Furthermore, 

Cronqvist et al. (2009, p. 337) found that CEOs who employ entrenchment strategies 

tend to pay higher salaries to employees instead of paying higher dividends to share-

holders or improving the bottom line. This behaviour supports the shareholder expense 

view by demonstrating that CSR activities, such as higher employee salaries, are an ex-

pense for shareholders. 

 

Also supporting the shareholder expense view, Fisher-Vanden and Thorburn (2011, p. 

444) report that voluntary environmental activities initiated by corporations may have a 

negative impact on stock performance. This finding suggests that initiatives to reduce 

greenhouse gas emissions by corporations can conflict with maximising shareholder 

value (Fisher-Vanden & Thorburn, 2011, p. 444). Their sample includes 117 announce-

ments to participate in two voluntary environmental programmes (the EPA’s Climate 

Leaders and Ceres) from 1993 to 2008. 

 

According to Renneboog et al. (2008, p. 316), mutual funds that invest in ethical, socially 

responsible, and environmental themes in the United States, continental European, and 



25 

Asia-Pacific countries lag behind their local benchmarks by roughly 2.2 to 6.5 percent 

annually. Their sample consists of 440 equity mutual funds in 17 countries within three 

regions from 1991 to 2003. However, conflicting with Renneboog et al. Study, Hill et al. 

(2007, pp. 170-172) find that socially responsible firms generated positive alpha for the 

U.S. and European portfolios over a long-term investment horizon (1995-2005). They 

conclude that European investors seem to value firms with high CSR in the short- and 

long-term. Their sample consisted of 33 publicly listed firms in three regions from 1995 

to 2005. 



26 

3 Acquisition Premiums 

Acquisition premium, according to Qiao and Wu (2019, p. 3), can be defined as the ad-

ditional price paid by the acquirer exceeding the target’s fair value. Haleblian et al. (2009, 

p. 485) measure acquisition premium in the following equation:  

 

Acquisition premium =  (Purchase price − Target's stock price pre-acquisition) 
Target's stock price pre-acquisition  .        ( 1 ) 

 

Acquisition premiums are interesting to study because they vary substantially and have 

a considerable impact on the successful completion of the transaction. According to 

Haunschild (1994, p. 393), firms can pay an average premium of 50 percent and premi-

ums can reach 100 percent. As overpayment is typical, the acquirer’s post-merger per-

formance is often negatively impacted and can even cause bankruptcy for the acquirer 

(Haunschild, 1994, p. 393).  

 

Before delving into acquisition premiums, the key aspects of M&A activities are outlined. 

The first section provides an overview of M&A, covering various types of M&A transac-

tions, M&A process, and the M&A environment in Europe. The following section, 2.3, 

discusses the rationale why firms undertake acquisitions. Chapter 3.3 then provides a 

detailed discussion of acquisition premiums and their underlying causes. 

 

3.1 Understanding acquisitions 

Mergers and acquisitions are frequently used as synonyms in academic literature. De-

spite their technical differences, authors fail to distinguish between mergers and acqui-

sitions. Term acquisition refers to a transaction where a firm acquires another, resulting 

in a situation where the acquirer remains a legal entity while the acquired firm ceases to 

exist and is consolidated into the acquirer. A merger occurs when two firms fuse into one, 

resulting in a third company where the two original merging firms no longer exist. 

(Moeller & Brady, 2014, p. 9.)  



27 

M&As are essential in corporate strategy as they enable firms to expand, restructure, 

and diversify their operations. M&As are significant transactions that can either generate 

or eliminate shareholder value (Cumming et al., 2023, p. 1465). According to the Insti-

tute for Mergers, Acquisitions & Alliances (IMAA), which tracks M&A activities, the num-

ber of M&A globally has increased from 10.814 in 1990 to 39.603 in 2023, as illustrated 

in Figure 3. Similarly, the total value of worldwide M&A deals has risen from USD 540 

billion in 1990 to USD 2.5 trillion in 2023. 

 

 

Figure 3. Worldwide M&A transactions 1990-2023 (IMAA, n.d.). 

 

Prior literature suggests that global M&A activity fluctuates and is driven by macroeco-

nomic circumstances and economic cycles. According to neoclassical economic theory, 

external shocks, whether economic, regulatory, or technological, have the potential to 

disrupt industries and create merger waves (Vinogradova, 2021, p. 360). These merger 

waves occur when the industry shocks are concentrated during periods of high capital 

liquidity (Cumming et al., 2023, p. 1454). From a behavioural finance perspective, Gra-

ham (2022, p. 2022) finds evidence that firm executives actively try to time the market 

by issuing debt when interest rates are low and issuing equity when stock valuation is 

high. The fact that CFOs try to time the market may further act as a trigger for merger 

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Mergers & Acquisitions Worldwide

Number of Transactions Value of Transactions (in bil. USD)



28 

waves. During merger waves, the demand for target firms increases, which explains the 

disparities in acquisition premiums at different times (Vinogradova, 2021, p. 360).  

 

3.1.1 Types of M&A transactions 

M&A transactions can be divided into three main types, horizontal, vertical, and con-

glomerate mergers (Cumming et al., 2023, p 1485). They state that horizontal mergers 

concern firms operating within the same industry, while vertical mergers occur when 

firms involved in different phases of the supply chain combine. Conglomerate mergers, 

on the other hand, concern firms in unrelated operations, such as different industries or 

geographical locations (Cumming et al., 2023, p. 1485). Cross-border acquisitions differ 

from domestic ones because the target firm is in a different country than the acquirer. 

Thus, factors like cultural, geographical, and institutional differences between the two 

countries play a larger role in these deals (Cumming et al., 2023, p. 1485). 

 

On the sell-side spectrum of M&A activities are divestitures, namely equity carve-outs, 

spin-offs, and sell-offs (Hulburt et al., 2002, p. 88). Divestitures and carve-outs allow 

managers to sell assets, product lines, or business units that no longer fit a company’s 

strategy (Haleblian et al., 2009, p. 491). Spin-offs include distributing the company’s 

shares to the parent company’s shareholders and thus creating a publicly traded com-

pany with the same initial shareholders, while sell-off allows managers to exit the com-

pany’s assets (Hulburt et al., 2002, p. 88). 

 

The type of an M&A acquirer has an impact on the valuation of the target. M&A acquir-

ers are typically divided into financial and strategic acquirers. According to Fidrmuc et al. 

(2012, p. 829), strategic acquirers are typically other firms in the industry, while financial 

buyers are typically private equity or venture capital firms. They state that from the sell-

ing point of view, the two acquirers differ significantly. When selling to a financial ac-

quirer, the current management often stays within the firm, partially owning the firm 

while also benefiting from future growth. Conversely, strategic acquirers tend to merge 

the acquired assets into the acquirer’s operations. According to Fidrmuc et al. (2012, p. 



29 

829), strategic acquirers are willing to pay a higher premium as they can optimize the 

use of the target firm’s assets more effectively. Moreover, strategic acquirers can realise 

the benefits of synergies between their firm and the target firm (Fidrmuc et al., 2012, p. 

829). Gorbenko (2019, p. 89) finds that an average U.S. strategic acquirer is willing to pay 

a 27.9 percent premium for the target while financial acquirers pay on average 18.6 per-

cent premiums. 

 

M&A transactions are divided into friendly and hostile takeovers based on whether the 

target firm’s board of directors approves the deal. Gigante and Rubinacci (2023, p. 491) 

state that prior literature provides mixed findings regarding friendly and hostile takeo-

vers. Three studies cited by Gigante and Rubinacci (2023, p. 491) find that the acquirer’s 

cumulative abnormal returns (CARs) for unfriendly takeovers are statistically insignificant, 

while friendly takeovers generate positive and statistically significant gains. They argue 

that managerial hostility may result in larger acquisition premiums and, thus, reduce the 

value for the acquiring firm’s shareholders. They, however, note that the number of hos-

tile takeovers has significantly decreased since the mid-1990s, and the mood variable 

has led to inconsistent findings (Gigante & Rubinacci, 2023, p. 491).  

 

3.1.2 M&A process 

The following Figure 4 illustrates the pre-deal M&A process. The target selection, bidding 

and negotiation, and valuation phases are especially important in this thesis as they are 

considered to be closely linked with the target’s CSR performance and the final determi-

nation of the acquisition premium. The acquisition premium is determined during the 

valuation, financial terms, and financing phase of the deal. A more detailed discussion 

of the factors influencing acquisition premiums can be found in section 3.3.  

 

 

 



30 

 

Figure 4. Pre-deal M&A process (Welch et al., 2020, p. 844) 

 

The initiation phase is the strategic choice to engage in M&A. Welch et al. (2020, pp. 

847-849) find that behavioural reasons, such as competitors’ decreased innovation, ex-

ecutive-driven factors, such as hubris, and firm ownership characteristics, such as large 

share of males in the board of directors, all increase the probability to engage in M&A. 

The majority of prior literature states that risk-averse executives or directors, such as 

family enterprises and firms owned by the state, are less probable to undertake M&A 

(Welch et al., 2020, p. 494).  

 

Target selection includes screening of potential target firms through, for example, inter-

nal lists of prospects, market screening, and the recommendations of external advisors 

(Welch et al., 2020, pp. 850-851). They note that prior literature has focused on evaluat-

ing target attractiveness through resource-based theory, where patents, strong R&D ac-

tivity, and sustainability increase the probability of firms becoming targets. Moreover, 

firms similar to the acquirer in terms of geography, products, and human resources are 

generally considered advantageous for the acquisition (Welch et al., 2020, pp. 850-851). 

The authors state that similarity is preferred, as cross-border acquisitions are perceived 

as more difficult to integrate, and there is a higher risk that synergies do not realise. 

Finally, the authors note that prior literature has emphasised that information asym-

metry negatively impacts the assessment of target firms (Welch et al., 2020, pp. 850-

851). 

 

The bidding and negotiation phase follows the target selection process. The phase in-

cludes private negotiations between the acquirer and the target, often beginning with 

an initial nonbinding offer (Welch et al., 2020, pp. 851-853). The authors note that the 

Initiation Target 
Selection

Bidding and 
Negotiation

Valuation, 
Financial Terms, 

Financing
Announcement Closure



31 

bidding process differs between public and private firms, as public firms are subject to 

regulations requiring a public tender offer. The authors state that increased competition 

during the bidding process has been shown to drive up the purchase price and lead to 

the winner’s curse. Consequently, bidders favour direct negotiations with fewer bidders 

to maintain control over pricing. To accelerate negotiations, acquirers may use tactics 

such as toeholds (partial stake), time pressure, or low cash offers, while targets may 

counter these with the use of termination fees, inviting additional bidders, or advising 

shareholders to reject offers deemed inadequate (Welch et al., 2020, pp. 851-853). They 

state that negotiations include behavioural biases, and executive overconfidence drives 

acquirers to proceed with bids even when faced with negative information. Ultimately, 

trust between the parties has a significant impact on the negotiation outcomes (Welch 

et al., 2020, pp. 851-853). 

 

The valuation, financial terms, and financing phase occur simultaneously with due dili-

gence and negotiations (Welch et al., 2020, pp. 853-856). They state that a key part of 

the phase is to assess and quantify the anticipated strategic benefits of the deal. Execu-

tives with industry experience are more likely to conduct accurate valuations of the tar-

gets compared to managers with less experience (Welch et al., 2020, pp. 853-856). Ad-

ditionally, the authors state that the chosen payment method is linked to information 

asymmetry and uncertainty of the target’s intrinsic value, as stock payment signals the 

acquirer’s caution and the acquirer’s willingness to share the risk of the transaction with 

the target. Finally, the availability of external funding can significantly impact the bidding 

strategies of acquirers (Welch et al., 2020, pp. 583-586). 

 

The public announcement concludes the behind-the-doors negotiations between the 

parties. Welch et al. (2020, p. 856) emphasize the importance of impression manage-

ment during the announcement phase, as negative stock market reactions may hinder 

the support of key stakeholders and, thus, compromise the closing of the deal. The au-

thors note that prior literature has found that acquirers often issue more press releases 

regarding non-fundamental information of the firm and use optimistic language 



32 

throughout the negotiations. Welch et al. (2020, p. 856) note that the public announce-

ments are released to improve the stock prices. Moreover, as deals financed with acquir-

ers’ stock signal to the market that the acquirers’ stock is overvalued, acquirers should 

clearly communicate the deal’s rationale and terms to investors to reduce negative stock 

market reactions (Welch et al., 2020, pp. 856-587). 

 

Closure is the final phase in the M&A process. The phase includes mandatory filings with 

authorities, final financing negotiations, shareholder voting regarding the deal, signing 

the SPA (share purchase agreement), and preparation of the post-merger integration 

(Welch et al., 2020, p. 857). The authors note that the antitrust authorities must approve 

the merger before the parties can proceed with the final closing and move to post-mer-

ger integration activities. Arouri et al. (2019, p. 176) note that deals may fail due to op-

position from either the acquirer’s or target’s shareholders, failure to obtain financing, 

or regulatory resistance. 

 

3.1.3 M&A in Europe 

According to IMAA, the number of M&A in Europe has increased from 5.009 in 1990 to 

13.848 in 2023, as illustrated in Figure 5. Similarly, the total value of M&A deals in Europe 

has risen from EUR 203 billion in 1990 to EUR 1.2 trillion in 2023. In the peak year 2021, 

the value of deals reached EUR 2.6 trillion. 

 



33 

 

Figure 5. M&A transactions in Europe 1990-2023 (IMAA, n.d.). 

 

Moschieri and Campa (2014, p. 1478) find that M&A transactions vary greatly by EU 

country due to economic factors like corporate ownership structures, governance frame-

works, and the reliance on banks for financing. They find that European deals are typi-

cally friendly, as opposed to more hostile offers in the United States. The study also 

shows that transaction characteristics, including parties’ attitudes and the number of 

competing offers, have a greater influence on deal completion than regulatory factors or 

payment methods. Faccio and Masulis (2005, pp. 1345-1346) find that the ownership is 

more concentrated in Europe, with 63 percent of publicly traded firms having a sole 

shareholder who controls over 20 percent of the votes, compared to the United States, 

where the number is only 28 percent.  

 

The M&A environment in Europe is impacted by legislation that restricts and promotes 

M&A deals within Europe. In the European Union, the Council Regulation (EC) No 

139/2004 is the primary legislation for governing the markets by deciding if firms can 

merge into one. Mergers exceeding a certain threshold and involving multiple EU nations 

are subject to the jurisdiction of the EU’s competition authority, which requires member 

countries to follow the European Commission’s ruling (Dinc & Erel, 2013, p. 2474). The 

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Mergers & Acquisitions Europe

Number of Transactions Value of Transactions (in bil. EUR)



34 

regulation has an impact on a wide range of market participants, including large EU and 

non-EU firms (Bartalevich, 2020, p. 383).  

 

The European Commission’s merger control sets out rules concerning mergers. Bartale-

vich (2020, p. 383) states that horizontal mergers occur when two competing firms op-

erating in the same market merge and can be blocked by the Commission if they are 

expected to cause harm to consumers by raising prices, reducing product choices or 

quality, or hindering innovation. Thus, horizontal mergers have to undergo competitive 

assessment. Non-horizontal mergers include vertical and conglomerate mergers and are 

generally not seen as a threat to competition except if the merging firm possesses sig-

nificant market power (Bartalevich, 2020, p. 383). 

 

Furthermore, M&As are subject to the European Union’s antitrust legislation, including 

Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU). 

TFEU Article 101 concerns rules regarding cartels by forbidding anti-competitive agree-

ments such as fixing prices and market sharing between competitors. FFEU Article 102 

forbids the abuse of dominating market position when it impacts trade between the 

member states within the EU. Violations can include enforcing unfair prices, restricting 

production, or disadvantaging competitors via contradictory terms in contracts.   

 

Prior literature, however, finds that European competition and trade policy can take pro-

tectionist stances. Dinc and Erel (2013, p. 2471) find that European governments favour 

domestic ownership of target firms over foreign ownership. This favouritism hinders the 

completion of acquisitions and discourages foreign corporations from tendering for fu-

ture acquisitions in the country. The authors conclude that such protectionist measures 

harm especially cross-border acquisitions within Europe. Furthermore, as M&A transac-

tion causes a greater competitive threat to competing European domestic firms, the like-

lihood of European regulatory intervention increases, especially if the acquirer is from a 

non-EU country (Moscieri & Campa, 2014, p. 1479). 

 



35 

Despite the efforts of the European Commission to ensure competitive markets, Koltay 

et al. (2023, p. 466) find that competition in Europe has sharply declined. They state that 

within the past two decades, the markets have become more concentrated and are mov-

ing towards oligopoly. Koltay et al. (2023, p. 476) define oligopoly as an industry that has 

high concentration, measured by the four largest firms accounting for more than 50 per-

cent of sales. Calligaris et al. (2024, p. 8) find that industries with strong M&A activity 

seem to have higher concentration and markups (i.e., difference between product price 

and cost). They (p. 14) suggest that firms use M&A as a mean to sustain their market 

position by acquiring their direct competitors. Moreover, declined competition leads to 

firms with high market power to increase the prices, and thus, their profitability (Cal-

ligaris et al., 2024, p. 14). They suggest that firms engage in M&A to increase their market 

share.  

 

3.2 Acquisition rationale 

Empirical evidence suggests that M&A activities decrease the value of the acquiring firm 

in the short- and long-term. In contrast, due to acquisition premiums, the target firm’s 

shareholders seem to experience positive returns from acquisitions. Gorton et al. (2009, 

p. 1292) find that, on average, the acquirer’s stock price tends to drop when a merger is 

announced. While acquisitions generate overall gains when examining firm value from 

the perspective of both the acquirer and target, the breakdown of these gains reveals 

that targets contribute primarily to the gains, whereas acquirers often experience neu-

tral or negative returns. (Haleblian et al., 2009, pp. 469-471.) Given that acquirers em-

pirically do not benefit from acquisitions, it raises the question: if M&A typically reduces 

shareholder value for acquiring firms, why do companies still pursue it?  

 

A common rationale for acquirer’s engaging in M&As is that of Welch et al. (2020, p. 847) 

who argue that key rationales for M&A are competition, economies of scale, synergies, 

and diversification. In contrast, Hillman et al. (2009, p. 1405) argue that a key rationale 

for firms engaging in M&A is to reduce competition. Haleblian et al. (2009, pp. 472-473) 



36 

argue that according to the market power hypothesis, a decrease in the number of com-

petitors within the industry enhances the firm’s ability to influence pricing. Essentially, 

this suggests that acquirers undertake M&A not only to eliminate direct competitors but 

also to consolidate their market position to create a monopoly, leading to increased mar-

ket share and pricing power within the industry (Haleblian et al., 2009, pp. 472-473). 

Hillman et al. (2009, p. 1405) note that this has been empirically supported by prior lit-

erature showing that firms are likely to acquire firms similar to them. Most importantly, 

in places like EU, the evidence strongly supports this interpretation of the decades long 

modern experience of industrial competition or, more accurately, lack thereof. 

 

Trautwein’s (1990, pp. 284-285) efficiency theory explains synergy achievement as a ra-

tionale for M&A transactions. As synergies generate cost savings for the acquiring firm, 

efficiency theory is linked to appreciating firm value through M&A activities. Trautwein 

divides synergies into three types: financial, operational, and managerial synergies. Fi-

nancial synergies are linked to decreased cost of capital by lowering the firm-specific risk 

of the firm through the acquisition of an unrelated business or increasing the size of the 

firm. However, Trautwein (1990, p. 284) notes that financial synergies have faced criti-

cism as they cannot be realized in efficiently functioning financial markets.  

 

The concept of operational and managerial synergies is criticized for being rarely realiz-

able (Trautwein, 1990, pp. 284-285). Operational synergies originate from integrated 

processes of originally independent departments or from the transfer of knowledge. He 

argues that operational synergies must be evaluated against the expense of relocating 

assets to determine whether they are realisable. Managerial synergies are achieved 

when the acquirer's management displays advanced planning and oversight capabilities 

that result in improvements to the target's operational performance (Trautwein, 1990, 

p. 284). 

 

An additional theory that acknowledges the appreciation of the acquiring firm’s value is 

the synergy theory posited by Kitching (1967). Kitching (1967, pp. 92-94) argues that 



37 

when two firms merge, their combined value exceeds their individual value when oper-

ating separately. “Two plus two equals five” encompasses the idea of the synergy theory. 

He finds that synergy benefits are the highest in finance as the merged firm has a larger 

asset base, making it easier to access financing and potentially lowering the cost of bor-

rowing through lower interest rates. Moreover, he finds that marketing has the second 

largest synergy payoff, while technology and production often do not achieve synergy 

benefits (Kitching, 1967, pp. 92-94). According to Bauer and Friesl (2024, p. 40), for ac-

quisition to be economically beneficial, the value of the realised synergies has to be 

greater than the sum of the target’s acquisition price, including the premium paid, fi-

nancing expenses, and transaction costs. However, they (2024, p. 38) also note that only 

40 to 60 percent of acquisitions perform, possibly due to no realised synergies or insuf-

ficient post-merger integration. In summary, there seems to be a gap between the de-

scriptive reality of actual M&A performance compared to its theoretically expected ben-

efits. 

 

3.3 Acquisition premium causes 

As acquisition premiums play a significant role in transactions and the performance of 

firms participating in M&A, their cause must be examined. Table 1 illustrates the key 

causes of acquisition premiums according to prior literature. I have grouped the key fac-

tors into four categories: target-related, market-related, behavioural, and transaction-

related causes. The causes are discussed in more detail in the following paragraphs. 

 



38 

Table 1. Factors impacting acquisition premium. 

 
 

The first category concerns target-related factors. Laamanen (2007, p. 1360) finds that 

firms with high intangible assets tend to receive higher acquisition premiums. He sug-

gests that the market struggles to accurately value a firm’s innovation (i.e., as proxied by 

its R&D activities). He notes, however, that the increased premium due to high R&D does 

not lead to value destruction for the acquirer’s shareholders. Alexandridis et al. (2013, p. 

1) find an inverse relationship between target size and the acquisition premium, showing 

that acquirers often pay lower premiums for larger firms, suggesting that firm size may 

be an indicator of perceived difficulty in large transactions. According to Haleblian et al. 

(2009, p. 486), target firms with strong shareholder control typically receive larger pre-

miums, as shareholders tend to influence the negotiations. They state that if sharehold-

ers are weaker compared to the CEO, the CEO may accept reduced premiums for a posi-

tion in the merged entity. Moreover, they state that targets with institutional sharehold-

ers are more inclined to receive offers but at lower premiums, implying poorer negotia-

tion power resulting in value reduction for target shareholders (Haleblian et al., 2009, p. 

486).  

 

Category Related cases based on prior literature
Impact on 
premium*

A: Target High intangible assets (Laamanen, 2007; Haleblian et al., 2009), +
Target size (Alexandridis et al., 2013), +/-
Ownership and management structure (Haleblian et al., 2009), +
Synergies (Haunschild, 1994; Laamanen, 2007). +

B: Market Regulation (Simonyan, 2014), +/-
Consolidated industries (Simonyan, 2014). +

C: Behavioral Hubris (Hayward & Hambrick, 1994), +
Winner’s curse (Haunschild, 1994); existence of competing bids. +

D: Transaction M&A advisor (Reuer et al., 2012), +
Cash payment (Alexandridis et al., 2013), +
Tone of transaction (Reuer et al., 2012), +/-
Auction set-up (Bulow & Klemper, 2009). +/-

*Sign expressed as + (-) when the underlying cause increases (decreases) the acquisition
premium.



39 

As discussed earlier, synergies are a key argument for acquisitions. Haunschild (1994, p. 

393) notes that the prior evidence is weak on synergies, while Laamanen (2007, p. 1367) 

argues that firms are willing to pay a premium explicitly for synergies, as combining ac-

quirer’s resources with the target’s leads to value-creation opportunities. Moreover, the 

tendency of bidders operating within the same sector as the target suggests that indus-

try overlap captures possible synergy effects, as proven in positive industry wealth ef-

fects following takeover announcements (Eckbo, 2009, p. 160).   

 

The second category concerns market-related causes. According to Simonyan (2014, p. 

93), market misvaluation has an impact on acquisition premiums, where market under-

valuation, negative investor sentiment, and high volatility lead to higher premiums, 

while overvaluation and positive investor sentiment lead to lower premiums. Moreover, 

they state that regulation impacts premiums, where takeovers in regulated industries 

have lower premiums if they happen just before the industry is deregulated. Finally, firms 

in consolidated industries with surplus resources attract higher premiums compared to 

other sectors (Simonyan, 2014, p. 93). 

 

The third category includes behavioural factors, such as hubris and the winner’s curse, 

that increase the acquisition premium. According to Hayward and Hambrick (1997, p. 

102), overconfident acquirers pay larger premiums because they believe that they can 

manage target firms better. Moreover, premiums can result from agency conflicts, in 

which managers with excess cash seek empire-building methods to enhance their bene-

fit against the benefit of shareholders (Baldi & Silva, 2022, p. 2). Finally, Haleblian et al. 

(2009, p. 486) note that managerial ownership increases the premium as entrenched 

management of target will reject bids until they feel completely rewarded for their loss 

of control, called the “resistance argument”. According to Haunschild (1994, pp. 393-

394), a key cause for acquisition premiums is competition. They state that prior literature 

finds evidence that the existence of competing bids results in higher premiums for tar-

gets. The argument for the competition is supported by the “winner’s curse” theory, dis-



40 

cussed more in detail in chapter 5.2.4, which states that the winner of the bidding con-

test is the party who most overstated the fair value of the target (Haunschild, 1994, p. 

394).   

 

The final category concerns transaction-related factors and their impact on the acquisi-

tion premium. Reuer et al. (2012, pp. 679-680) find that targets with prominent advisors 

receive higher premiums in transactions. This may be explained by Haunschild’s (1994, 

p. 406) finding that M&A advisors, such as investment bankers involved in the deal, in-

fluence the premium paid, leading to similar premiums for firms using the same advisors 

but differing from those working with different advisors. Moreover, cash payments in 

transactions lead to lower acquisition premiums (Alexandridis et al., 2013, p. 7). Baldi 

and Silva (2022, p. 2) argue that in cash transactions, the acquirer’s shareholders bear 

the risk of synergies not materialising, whereas, in stock transactions, the risk is shared 

with the target’s shareholders. The acquirer’s stock valuation is also debated as a reason 

for M&A deals, as prior literature finds that overvalued acquirers often pay higher pre-

miums for their targets (Baldi & Salvi, 2022, p. 1; Cumming et al., 2023, p. 1454). Fur-

thermore, the tone of the transaction, as the target’s board approving the takeover, im-

pacts the premium. According to Reuer et al. (2012, pp. 679-680), hostile takeovers re-

ceive higher deal premiums compared to friendly transactions. 

 

Finally, how the auction is set up impacts the acquisition premium. According to Bulow 

and Klemper (2009, p. 1454), auctions often result in higher premiums due to competi-

tive bidding, driven by the winner's curse phenomenon, which causes bidders to overpay 

for targets by overestimating the target’s value. They state that while sequential bidding 

is more efficient and preferred by bidders, it allows for pre-emptive jump-bids, which 

deters other bidders, reduces competition, and cuts prices. As a result, sellers prefer 

auctions, which maximise earnings despite the overpayment risk for bidders (Bulow & 

Klemper, 2009, p. 1454). 



41 

4 Literature Review 

The literature review chapter discusses the prior empirical literature on the cross-section 

of CSR and acquisitions. First, empirical evidence on the impact of CSR on M&A is re-

viewed. Followed by review of prior literature on CSR and acquisition premiums, espe-

cially focusing on the target’s CSR rating.  

 

4.1 Empirical evidence on the impact of CSR on M&A outcomes 

For decades, academic studies have focused on CSR. As described in Chapter 3.2, prior 

studies have demonstrated that CSR has an impact on valuation, risk, and financial per-

formance. Few authors have attempted to investigate CSR within the context of M&A 

transactions. Table 2 illustrates the prior literature on the cross-section of CSR on M&A 

outcomes. These studies are highlighted in this sub-chapter. 

 

Table 2. Summary of prior literature on CSR on M&A outcomes. 

 

Authors Dependent Variable Explanatory Variable
Geographical 
Area

Time Period Significance

Aktas et al. (2011) Announcement returns Target CSR Global 1997-2007
Significant positive on 
acquirer gains

Arouri et al. (2019) Deal uncertainty Acquirer CSR Global 2004-2016 Significant negative

Deng et al. (2013)

Announcement returns, 
post-merger operating 
performance, long-
term stock 
perfromance, deal 
duration

Acquirer CSR USA 1992-2007
Significant positive - 
Significant negative on 
deal duration

Fatemi et al. (2017) Announcement returns Acquirer CSR Japan 2000-2014 Insignificant

Gomes (2019)
Probability of becoming 
a target

Target CSR Global 2003-2014 Significant positive

Hussain & Shams (2022) Announcement returns
CSR difference 
(Acquirer - Target)

Global 2003-2016
Significant positive 
(negative) for acquirer 
(target)

Krishnamurti et al. (2019)
Announcement returns, 
Bid premiums

Acquirer CSR Australia 2000-2016

Significant positive on 
announcement 
returns - Significant 
negative on bid 
premium

Krishnamurti et al. (2021)
M&A investment, bid 
premium

Firm CSR USA 1999-2016 Significant negative 

Tampakoudis et al. (2021) Announcement returns Acquirer CSR USA 2018-2020 Significant negative

Yen & André (2019) Announcement returns Acquirer CSR
Emerging 
markets

2008-2014 Insignificant



42 

In the context of M&A announcements, Aktas et al. (2011, p. 1754) show how SRI gen-

erates value for shareholders, particularly when acquiring targets with strong social and 

environmental ratings. The study indicates a positive correlation between the abnormal 

returns of the acquirer and the CSR rating of the target. This suggests that targets with 

higher ratings yield substantial financial benefits for the acquirer’s shareholders. The 

study includes listed acquirers globally from 1997 to 2007. 

 

However, Tampakoudis et al. (2021, p. 1117) more recent study conflicts with Aktas et al. 

(2011). They find that during the COVID-19 pandemic, ESG performance is connected 

with value-decreasing implications for acquirer shareholders. Firms with high ESG-rat-

ings suffered negative announcement returns, while firms with low ESG-ratings bene-

fited from merger announcements. Tampakoudis et al. (2021, p. 1117) state that the 

market views ESG initiatives as costly investments that reduce shareholder value during 

the pandemic. Their sample consist of 889 finalized M&A transactions in the United 

States from 2018 to mid-2020.   

 

Similarly to Aktas et al. (2011, p. 1754), Deng et al. (2013, p. 89) find that acquirers with 

high CSR ratings received higher stock returns when announced, greater post-merger 

operating performance, and superior long-term stock returns. Furthermore, they find 

that acquisitions with high CSR acquirers are completed faster and are less likely to fail. 

They study 1.556 finalized mergers in the United States from 1992 to 2007. The study 

shows that CSR in acquisitions mitigates conflicts of interest between the shareholders 

and other stakeholders, benefiting both sides (Deng et al., 2013, p. 90).  

 

Krishnamurti et al. (2019, p. 2) extend Deng et al.’s (2013, p. 89) sample to Australian 

firms. Their sample consists of 776 Australian firms from 2000 to 2016. In line with Deng 

et al. (2013, p. 89), Krishnamurti et al. (2019, p. 2) find that high-CSR firms receive posi-

tive stock returns when the M&A deal is announced. Moreover, they find a significant 

negative relationship between the acquisition premium and the acquirer’s CSR rating. 

This implies that high-CSR acquirers tend to pay lower premiums in acquisitions, thus 



43 

improving the shareholder value. Finally, high-CSR acquirers tend to engage in single bids 

and avoid bidding for multiple targets (Krishnamurti et al., 2019, p. 2).  

 

Contradictory to Australian and U.S. results, Fatemi et al. (2017, p. 166) find no correla-

tion between acquirers’ ESG rating and abnormal returns in 243 Japanese M&As from 

2000 to 2014. They study whether the acquiring firm’s shareholders see gains sixty 

months after the transaction but find no significant long-term impact. The authors sug-

gest that the results differ from prior studies due to the corporate control in Japan dif-

fering from that in the U.S. and other Western countries. 

 

Likewise, Yen and André (2019, p. 114) find no correlation between acquirer’s CSR rating 

and announcement returns. Their sample consists of 1986 cross-country M&A deals in 

23 emerging countries from 2008 to 2014. The authors suggest that their findings are 

not consistent with prior studies as developing countries portray weak governance qual-

ity and agency issues.  

 

Equivalently to Deng et al. (2013), Arouri et al. (2019, p. 176) study the impact of an 

acquirer’s CSR rating on the uncertainty related to M&A transactions. Their sample ex-

tends Deng et al.’s (2013) focus by including 726 global M&A transactions from 2004 to 

2016. Arouri et al. (2019, p.177) find that the deal uncertainty has an inverse relationship 

to acquirer’s CSR. They discover that when acquirer’s CSR rating increases, the transac-

tion’s arbitrage spread decreases. The individual elements of CSR rating (environmental, 

social, and governance) are similar to the aggregate CSR score. The authors suggest that 

the acquirer’s CSR has a significant influence on the market’s perceptions of the M&A 

transaction’s successful completion globally.  

 

Hussain and Shams (2022, p. 1) study the link between announcement returns and CSR 

rating. The dependent variable measures the cumulative abnormal returns (CARs) aris-

ing from announcing the acquisition. Their explanatory variable is the CSR difference 

constructed by deducting the target’s CSR rating from the acquirer’s. Hussain and Shams 



44 

(2022, p. 11) find that when the CSR difference is positive, on the M&A announcement, 

the acquirer experiences positive CARs while the target’s CARs are negative. The authors 

suggest that the findings can be explained by portability theory. According to Hussain 

and Shams (2022, p. 2), portability theory proposes that acquirers can transfer CSR prac-

tices to targets via M&A deals. They continue by stating that targets with poorer CSR 

practices may strengthen their CSR rating by adopting the acquiring firm’s CSR standards. 

Their sample consists of 1.334 global transactions from 2003 to 2016, including both 

domestic and cross-border deals.  

 

Gomes (2019, pp. 153-155), on the other hand, studies whether CSR ratings have an 

impact on which firms are selected as M&A targets. They find a positive relationship 

between the target’s CSR and its probability of becoming a target. The sample includes 

608 global deals in 15 different developed countries from 2003-2014. When studying the 

probability of a firm becoming an M&A target, the author employs logistic regression 

where the dependent variable is a binary with a value of 1 indicating a firm becomes a 

target, and a value of 0 if not. Gomes (2019, p. 157) argues that CSR has a strategic in-

fluence on M&A decisions, and the results are driven by CSR’s risk-reduction elements 

and improved transparency. 

 

Krishnamurti et al. (2021, pp. 467-468) study the trade-off of a firm investing in CSR ac-

tivities or M&A investment. They find a negative relationship between a firm’s CSR ac-

tivity and its likelihood to invest in M&A transactions. This is more profound in firms that 

have fewer available resources. Krishnamurti et al. (2021, pp. 484-486) argue that the 

trade-off is due to reconciling the interests of shareholders and stakeholders, contrary 

to managerial opportunism.  Krishnamurti et al. (2021, pp. 467-468) also find that high-

CSR firms with low M&A activity pay lower acquisition premiums and thus generate 

value for their shareholders. They find that one standard deviation rise in CSR leads to a 

50.18 percent decrease in the 30-day acquisition premium. Moreover, high-CSR firms 

with low M&A activity posit higher share prices in the long run and thus have higher 

valuations. Their sample consists of firms in the United States from 1999 to 2016.  



45 

 

The varying results in prior literature can be explained by differences in methodology 

among studies. First, Tampakoudis et al. (2021) extend their analysis to include the 

COVID-19 pandemic period from 2018 to 2020, providing more recent coverage com-

pared to the median sample year of 2006 when the CARs were positive. Second, the 

geographic focus of the sample also explains the results, as seen by Fatemi et al. (2017) 

and Yen and André (2019). They examine Japan and emerging markets, respectively, 

whereas other studies focus on firms in the United States or global samples.  

 

4.2 Empirical evidence of target’s CSR on acquisition premium 

Prior literature on CSR and M&A has focused majorly on the perspective of the acquirer. 

Regardless of the extensive study into the positive impact of CSR in the M&A context, as 

described in the previous section, the intersection is seldom explored from the perspec-

tive of targets and their impact on shareholder value. Prior literature on the target’s role 

in acquisition premiums remains scarce (Gomes & Marsat, 2018, pp. 70-72; Cho et al., 

2021, p. 379). As the role of the target’s CSR rating has received less attention, there is a 

gap in the literature regarding its impact on acquisition premiums. This section seeks to 

address this gap by examining the findings on the topic. Table 3 illustrates the few 

sources of literature that explore the relationship between an acquisition premium and 

the target’s CSR ratings. 

 



46 

Table 3. Summary of prior literature on acquisition premiums and target’s CSR rating. 

 
This section is divided into two parts. First, the positive relationship between acquisition 

premiums and the target’s CSR ratings is discussed. Followed by prior literature that 

found no statistically significant relationship between the two topics. 

 

4.2.1 Positive relationship 

Gomes and Marsat (2018, pp. 70-72) examine the relationship between CSR and the bid 

premiums from the strategic acquirers’ standpoint. Their study is unique in a way that 

they focus on the strategic acquirer’s viewpoint instead of the marginal investors’. Prior 

literature has focused on the marginal investors’ viewpoint through analysing stock 

prices, but Gomes and Marsat (2018, pp. 70-72) introduce the analysis of acquisition 

premiums. They find that acquirers pay more for targets with high CSR ratings. Gomes 

and Marsat (2018, p. 76) also study how the relationship differs in the case of domestic 

and cross-border transactions. They find that in cross-border deals, the social rating of 

the target causes a premium. The authors argue that acquirers pay more for targets with 

high social performance to offset increased risk related to cross-border deals due to in-

formation asymmetry.  Their sample consists of 588 global M&A transactions from 2003 

to 2014. The authors suggest that the relationship can be explained by reduced infor-

mation asymmetry as acquirers conduct rigorous due diligence examination of possible 

Authors Dependent Variable Explanatory Variable
Geographical 
area

Time Period Significance

Aktas et al. (2011) Announcement returns Target CSR Global 1997-2007

Significant positive 
on acquirer gains - 
Target CSR rating 
insignificant 

Chen & Gavious (2015) Announcement returns Target CSR Israel 2007-2012 Insignificant

Cho et al. (2021) Announcement returns
CSR difference (Target - 
Acquirer)

USA 1993-2016 Significant positive

Gomes & Mrsat (2018) Deal premiums Target CSR Global 2003-2014 Significant positive

Hussain & Shams (2022) Deal premium
CSR difference (Acquirer - 
Target)

Global 2003-2016 Significant negative

Jost et al. (2022) Acquisition premium Target and acquirer CSR Global 2003-2018 Insignificant

Li et al. (2021)
Acquisition premium 
(book value)

Target and acquirer CSR China 2007-2018 Significant positive

Ozdemir et al. (2022) Deal premiums Target CSR USA 1991-2018 Significant positive

Qiao & Wu (2019)
Cross-border 
acquisition premium

Target CSR Global 1991-2016 Significant positive



47 

targets and thus gain more knowledge of the firm that is not available to marginal inves-

tors.   

 

Gomes and Marsat’s (2018, pp. 70-72) findings are supported by Ozdemir et al. (2022, p. 

1022). Ozdemir et al. (2022, p. 1022) extend Gomes and Marsat’s (2018, pp. 70-72) study 

by examining whether firms operating in the service industry obtain higher premiums 

compared to firms in other industries. They find that in the service industry, the CSR-

acquisition premium relationship is stronger compared to firms operating in other indus-

tries. Their sample consists of 277 transactions in the United States from 1996 to 2018. 

Ozdemir et al. (2022, p. 1022) suggest that the findings can be explained by the signalling 

theory, as firms send positive signals to the market in order to increase their valuation.  

 

To investigate whether CSR plays a significant role in global M&A, Qiao and Wu (2019, 

pp. 16-17) extend their sample to include acquisitions where the acquirer and target are 

from separate countries. Qiao and Wu (2019, pp. 16-17) examine whether a target’s CSR 

rating has an impact on acquisition premiums in cross-border transactions. Their sample 

consists of 252 global transactions from 1991 to 2016. They find that acquiring a target 

with a strong CSR rating leads to a higher acquisition premium. However, as the gain 

decreases, there are increased institutional and cultural differences between the ac-

quirer and the target. Moreover, when there is a significant number of other M&A trans-

actions in the target’s country, the acquirer pays a lower premium. The authors argue 

that their findings support the institutional theory, which seeks to explain why organiza-

tions have certain similar characteristics (Qiao & Wu, 2019, pp. 16-17).  

 

Li et al. (2021, pp. 1-2) extend on Gomes and Marsat’s (2018, pp. 70-72) study by inves-

tigating whether CSR impacts acquisition premiums in China. Their sample consists of 

2.224 Chinese M&A deals from 2007 to 2018. Li et al. (2021, p. 10) find that target firms 

with high CSR ratings have higher bid prices, and thus, greater premiums. They also note 

that the effect is stronger when acquiring firms with higher CSR ratings, which increases 

the premium further.  Li et al. (2021, pp. 6-7) study the link between CSR and acquisition 



48 

premiums in China. Thus, they retrieve CSR data from the China Stock Market & Account-

ing Research (CSMAR) database. Unlike other studies on the topic, they use book value 

as a proxy for acquisition premium. 

 

Cho et al. (2021, pp. 378-379) examine the relationship between target CSR and acquisi-

tion performance with a different methodology compared to prior literature concerning 

the target’s CSR rating. Their explanatory variable measures the CSR difference by sub-

tracting the acquirer’s rating from the target’s. They use target’s abnormal cumulative 

return (CAR) as a proxy for measuring acquisition performance. They find that the tar-

get’s CARs are higher on the announcement when the target’s CSR rating is higher than 

the acquirer’s rating. Furthermore, they find that the effect of CSR is stronger when the 

acquirer is well-governed. Cho et al. (2021, p. 381)’s sample consists of 199 transactions 

in the United States from 1993 to 2016. The authors argue that market players expect 

bidders to pay a CSR premium in order to acquire the target and recognize probable 

synergy benefits in the transaction.  

 

Hussain and Shams (2022, p. 1) utilise a similar methodology as Cho et al. (2022). How-

ever, their explanatory variable is the CSR difference constructed by deducting the tar-

get’s CSR rating from the acquirer’s. Hussain and Shams (2022, pp. 13-14) find that ac-

quisition premium decreases when the CSR difference is positive. This implies that the 

acquirer with a stronger CSR rating compared to the target pays a lower acquisition pre-

mium. The authors suggest that the phenomenon is explained by an acquirer’s risk of 

being negatively impacted by the target’s poorer CSR rating. Moreover, they show that 

the completion of the transaction is faster when there is a positive CSR gap. Their sample 

consists of 1.334 global transactions from 2003 to 2016, including both domestic and 

cross-border deals (Hussain & Shams, 2022, p. 3). 

 



49 

4.2.2 No significant relationship 

Aktas et al. (2011, p. 1754) study socially responsible investing in the context of stock 

market performance. The focus of their study is how the target’s environmental and so-

cial ratings impact the stock market performance of the acquirer. They find that the pre-

deal CSR rating of the target firm is not significant. They explain the finding by suggesting 

that the stock market is already aware of the CSR rating of the firm, and therefore, the 

CSR performance is already priced in the share price. Aktas et al. (2011, p. 1754) study 

includes listed acquirers globally from 1997 to 2007.  

 

A study conducted by Chen and Gavious (2015, p. 29) studies the importance of CSR 

ratings to institutional investors, marginal investors, and M&A acquirers. They find that 

CSR has no significant relationship with M&A deals. The study is limited to Israel and has 

a relatively short timeframe from 2007 to 2012. Their sample consists of 134 Israeli M&A 

deals.  

 

A more recent study conducted by Jost et al. (2022, p. 8) confirms Aktas et al. (2011, p. 

1754)’s findings. Jost et al. (2022, p. 8) find no significant relationship between the ac-

quirer’s nor the target’s CSR ratings and the deal premium. The result holds true for both 

cross-border and domestic transactions. Their study consists of 1.598 global deals from 

the acquirer’s perspective and 449 deals from the target’s perspective from 2003 to 2018. 

Jost et al. (2022, p. 8) argue that the correlation between CSR and acquisition premiums 

may not be described solely by shareholder or stakeholder theories. 

 

Disparities in past literature can largely be attributed to methodological differences 

among studies. For instance, Chen and Gavious (2015, p. 29) include sample data from 

Israel, which may explain their insignificant results compared to studies with a global 

sample. Additional differences, such as those observed in the findings of Aktas et al. 

(2011, p. 1754) and Jost et al. (2022, p. 8), are most likely due to variations in model 

estimation used by authors.  



50 

5 Theoretical Framework 

The objective of the chapter is to explain the key theories that impact the study. The 

chapter is organized in the following way. First, the normative financial theories are dis-

cussed, followed by descriptive financial theories.  

 

Normative financial theories are those that explain how financial decisions shall be made 

(Peon & Antelo, 2012, p. 90). The key assumption in normative theories is that financial 

markets operate efficiently, and investors act rationally, have access to equal information, 

and want to maximise their wealth (Peon & Antelo, 2012, p. 97). They note that examples 

of normative financial theories include Capital Asset Pricing Model (CAPM), Markowitz 

Portfolio Theory, and Efficient Market Hypothesis by Fama (1970). In the context of this 

study, key theories related to finance and sustainability are discussed. Thus, shareholder 

and stakeholder theories are discussed in detail. In the context of acquisition premiums, 

these normative financial theories concern the valuation of the firm. 

 

Contrary to normative financial theories, descriptive financial theories describe how fi-

nancial decisions are actually made (Peon & Antelo, 2012, p. 91). These theories incor-

porate behavioural and psychological factors to explain real-world financial behaviour, 

including irrationality, biases and market inefficiencies (Peon & Antelo, 2012, p. 98). The 

key descriptive financial theories concerning acquisition premiums are information 

asymmetry, signalling theory, agency theory, and the winner’s curse. These theories con-

cern both the valuation of the target, and the bidding process. However, these descrip-

tive theories tend to overlap and especially information asymmetry impacts both the 

valuation of the target firm and the bidding for the firm. While theories concerning bid-

ding process are agency theory and winner’s curse.  

 



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5.1 Normative financial theories 

The shareholder and stakeholder theories offer opposing perspectives on value creation 

and sustainability. This subchapter will examine both shareholder and stakeholder theo-

ries in this setting. 

 

5.1.1 Shareholder theory 

Shareholder theory was first introduced by Friedman in 1970. According to the share-

holder theory, the only purpose of a company is to increase its profits and thus bring 

value to its shareholders. The shareholder theory is based on principal-agent relation-

ship. Firm executives act as an agent who act on behalf of the principals, the sharehold-

ers of the firm. Thus, executives have a fiduciary duty to make choices that ultimately 

serve the best interests of the principals. According to shareholder theory, this duty is 

fulfilled by maximising profits and creating financial gains for the firm’s shareholders, 

thereby ensuring their monetary prosperity. (Mansell, 2013, p. 585.) 

 

According to Deng et al. (2013, p. 89), shareholder theory, within the context of CSR, 

views CSR as an expense to shareholders. By prioritising sustainable activities over the 

interests of shareholders, firm executives destruct shareholder value. They give an ex-

ample of a firm establishing stricter pollution regulations than its competitors, leading 

to a firm investing excessive resources to unprofitable sustainability activities, diminish-

ing profitability and shareholder wealth. This leads to other stakeholders benefiting from 

CSR activities at the expense of shareholders, causing a shift of wealth from shareholders 

to stakeholders (Deng et al., 2013, p. 89). Shleifer and Vishny (1997, p. 738) note that 

sustainability projects that generate negative net present value (NPV), destruct share-

holder value. 

 

5.1.2 Stakeholder theory 

The opposing view to shareholder theory was introduced by Freeman in 1984 (Jensen, 

2001, p. 299). In contrast to shareholder theory, stakeholder theory states that firm’s 



52 

responsibility extend beyond the interests of shareholders to include external stakehold-

ers surrounding the firm (Mansell, 2013, p. 583). Stakeholders include all parties who 

are participating in the firm’s operations, such as customers, employees, suppliers, reg-

ulators, investors