Can Firms’ ESG initiatives deter hostile Takeovers?

Abstract

In this study, we examine the role of acquiree firms’ environmental, social, and governance (ESG) performance in affecting hostile takeover threats from acquiring firms. Our results show that firms facing hostile takeover threats increase investment in ESG initiatives. The positive association between hostile takeover threats and firms’ ESG investments is stronger for firms domiciled in states with expanded constituency statutes and for firms with fewer antitakeover provisions. Quasi-natural experiments based on the adoption of poison pill statutes further show that firms domiciled in states with such laws tend to exhibit lower levels of ESG investment after (vs. before) the passage of the statutes. In addition, we find that the probability of receiving hostile bids in a given year is lower for firms that increased their ESG investment in previous years, especially firms with a strong threat of ex-ante hostile takeover. Taken together, our findings suggest that firms use ESG investments as an important antitakeover device and that the threat of corporate hostile takeover has unintended effects on firms’ ESG investment and ethical business practices.