Does Reputation Matter? Evidence from Cross-Border M&As

Abstract

Better firm reputation could lead acquirers to pay a premium for the target. Using a cross-country sample between 2007 and 2017, we examine how firm environmental, social, and governance related reputational risk affects acquisition premiums in cross-border mergers and acquisitions. We find that targets with worse reputations tend to have lower acquisition premiums in cross-border deals, and this relation remains robust after controlling for characteristics affecting the investment environment. Additionally, the difference in reputational risk between target and acquirer matters, and the acquirer is likely to pay less for a target that has a worse reputation than acquirer itself. In particular, we construct a signal-country analysis based on U.S. targets to further examine this transfer effect in the reputational capital and find a consistent negative association between the difference in reputational risk and acquisition premium. These results suggest that target’s social performance is an important determinant of the merger performance, and they support the signaling theory that a firm’s reputation could send a signal about its overall quality.