The Impact of ESG on Leverage Policies: Evidence from Mergers & Acquisitions
Abstract
Using environmental, social, and governance (ESG) data on 110 global mergers and acquisition (M&A) deals completed between 2006 and 2019, this study pro- vides evidence of the impact of ESG performance on corporate financing poli- cies. The results show that acquirers consider the difference between their own and the target firm’s ESG score in their financing decisions immediately around the deal and in the years following the deal. Further, the results show that the acquirer’s deviation from its optimal level of leverage around the deal increases with the target firm’s relative ESG score before the deal. In the years following the deal, the acquirer’s ability to close the leverage deviation increases with the target firm’s relative ESG score before the deal. The results are robust to addi- tional tests. This study adds to the literature on the relevance of ESG in corporate finance by analyzing an empirical setting in which the expected value effects of ESG are traded against the cost of additional leverage.