Can ESG mitigate the diversification discount in cross-border M&A?

Abstract

This study seeks to understand how environmental, social, and corporate governance (ESG) affects business performance and the diversification effect of cross-border mergers and acquisitions (M&A) by examining 129 events on cross-border M&A in the Korean Stock Price Index (KOSPI) market representing emerging capital markets between 2012 and 2018 in 38 target countries. The findings indicate that better ESG engagement has a positive effect on the business performance of cross-border M&A, supporting stakeholder theory and confirming that ESG can serve as a strategy for boosting business efficiency in cross-border M&A. The findings also confirm that diversification in cross-border M&A leads to a diversification discount on business performance, negatively affecting acquiring firms, but that ESG engagement can mitigate the diversification discount as a friendly channel. The study's main contribution is providing empirical evidence that ESG can serve as a friendly channel through which to address the diversification discount issue. © 2021 Borsa Ä°stanbul Anonim Åžirketi