Professor Tong Li, along with other researchers, examined how target corporate social responsibility affects the economic gains for acquirers, as reflected in market reactions to an acquisition announcement, from two distinct perspectives: stakeholder preservation versus stakeholder appropriation. This study was published in the Academy Management Journal in 2020.

How do target stakeholders affect the extent acquirers benefit from merger and acquisition activities? Two distinct perspectives offer important insights into this issue: stakeholder preservation and stakeholder appropriation. Using a dataset of acquisitions in the United States, the team finds that target corporate social responsibility is positively associated with acquirer abnormal returns upon an acquisition announcement. Moreover, stakeholder value congruence between the merging firms strengthens this positive relationship, whereas business similarity between them weakens it. These findings align with the stakeholder preservation perspective and challenge the stakeholder appropriation perspective.

Background

Two distinct perspectives offer important insights on how target stakeholders affect the extent to which acquirers benefit from merger and acquisition: stakeholder preservation and stakeholder appropriation. The stakeholder preservation perspective suggests that positive market reaction to an acquisition stems from potential new value creation by honoring implicit contracts and maintaining good relationships with target stakeholders. By contrast, the stakeholder appropriation perspective posits that positive market reaction is primarily derived through wealth transfer to acquirers by defaulting on implicit contracts with target stakeholders.

Taken together, both perspectives make the same prediction of a positive relationship between target CSR and gains for acquirers. However, their underlying mechanisms (new value creation vs. wealth transfer) differ, suggesting distinct ways of redeploying target stakeholders. Therefore, the purpose of this research is to tease out the relationship between the two perspectives on whether one is more dominant than the other, or that both are relevant under different contingencies.

Positive relationship between target CSR and acquirer announcement return

To conduct the analysis, the team collected data on the basis of a sample of acquisitions from the Securities Data Company (SDC) database. The final sample included 237 deals from the period between 2000 and 2012, where transaction values exceed $1 million. For the independent variable, target CSR was measured on the basis of the five dimensions of KLD data: environment, employee, community, diversity, and product. Each dimension consisted of two components: strengths and concerns.

-In the first-stage Heckman model, the team found that acquirer size is negatively associated with the propensity to acquire a target with high CSR. Besides, CSR discrepancy is positively significant, indicating that firms with high CSR discrepancy are more likely to acquire a high CSR target, which is consistent with their prediction.

-The relationship between target CSR and the acquirer announcement return is positive and significant.

-The results support the hypothesis that stakeholder value congruence would strengthen the positive relationship between target CSR and acquirer announcement return, supporting the stakeholder preservation perspective.

-The results also show that business similarity would weaken the positive relationship between target CSR and acquirer announcement returns, which is also aligned to the stakeholder preservation perspective.

Contributions to existing literature

The empirical results provide stronger support for the stakeholder preservation perspective, highlighting that, in general, establishing trusting and cooperative relationships with stakeholders offers greater benefit than exploiting stakeholder vulnerabilities.

-In addition to its direct contributions to the conversations in the acquisition literature—especially those that focus on the period during the occurrence of an acquisition and the process of post-acquisition integration— arguments and findings in this study provide important implications for the role of market in corporate control and anti-takeover devices more generally. Contrary to the prevalent view that regards the presence of takeover threat as playing the role of disciplining incompetent managers and diminishing agency problems, this study suggests that providing autonomy, security, and protection for target stakeholders is more conducive to value creation.

-Next, this study provides new insights into the literature on the relationship between CSR and market response, in terms of abnormal returns. This study extends this stream of inquiry by providing novel theoretical approaches linking target CSR with acquirer announcement returns. Thus, it provides new insights into the conversation between the CSR and the acquisition literature.

-In addition, this study contributes to the acquisition literature that examines the role of similarities between acquirers and targets by highlighting the dark sides of similarity in the acquisition context. In particular, the results unveil that stakeholder value congruence increases the difficulties of implementing stakeholder appropriation, whereas business similarity may hinder stakeholder preservation. In this regard, this study suggests that the impact of similarities on value gain for an acquirer depends on what the acquirer intends to do with target stakeholders. Thus, future studies should be cautious not to oversimplify the role of similarity in acquisitions.

Practical Implications for Managers

The results of this study also have important practical implications for managers.

-Firstly, when evaluating a potential acquisition, the managers of an acquirer should consider the role of target stakeholders. In practice, an acquirer should consider the benefits and costs of stakeholder preservation and appropriation and exert efforts to achieve better financial gains by integrating both sides.

-Next, the managers of an acquirer should not assume that similarities between the merging firms are always beneficial for the acquirer. As demonstrated in this study, although stakeholder value congruence facilitates new value generation from the acquisition of a target with good CSR, business similarity can have a negative effect on new value creation from CSR. Thus, managers should be aware that although business similarity may independently be a source of synergy and acquirer gains from acquisitions, it might hurt acquiring firms when the target has good CSR.

Conclusion

In conclusion, this study proposes a theoretical framework to untangle how target stakeholders affect acquisition outcomes, as reflected in announcement returns for an acquirer. The results provide support for the stakeholder preservation perspective, which prevails against the stakeholder appropriation perspective. This framework may also inspire future research to further enrich the understanding of the relationship between target CSR and acquisition outcomes.

About the Author

Professor Tong Li is currently an assistant professor of the Department of Organization and Strategic Management at Guanghua School of Management. He graduated from Singapore Management University with interests in corporate social responsibility, merger and acquisition, and corporate governance. His research was published in Academy of Management Journal, Journal of Business Ethics, Management Review (in Chinese), and Quarterly Journal of Management (in Chinese). One of his papers was honored as the Academy of Management Best Paper Proceedings. Prof. Tong is also involved in several projects with the National Natural Science Foundation of China. He has attended many domestic and international academic conferences such as the Annual Meeting of Academy of Management, Strategic Management Society, International Association of Chinese Management Research, International Corporate Governance Society. In addition, Prof. Tong is the incoming editorial board member of Management and Organization Review (2022-2025) and is serving as the anonymous reviewer for Academy of Management Journal, Journal of Business Research, Journal of Business Ethics, Management and Organization Review, etc.