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The Role of Ethical Standards in the Relationship Between Religious Social Norms and M&A Announcement Returns

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Abstract

Prior studies suggest that firms headquartered in areas with strong religious social norms have higher ethical standards. In this study, we examine whether the ethical standards associated with local religious norms influence the M&A announcement returns. We document that the M&A announcement returns of acquirer firms increase with the strength of religious social norms in the area surrounding firms’ headquarters. We also document that the relationship is attenuated when acquirer firms have strong corporate social responsibility credentials, is amplified when public trust that firms act in the best interest of stakeholders suffers a negative shock and when the M&A deal has greater economic significance for the acquirer, and manifests predominantly in the lower tail of the distribution of M&A returns. Our findings are consistent with investor assessments of firms’ ethical standards driving the relationship between local religious social norms and M&A announcement returns. We find no evidence for the competing explanation—that investor assessments of firms’ risk preferences drive the documented relationship.

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Notes

  1. Prior research provides evidence consistent with high CSR firms having lower level of agency-related problems. For example, Kim et al. (2014) find that firms with strong CSR credentials have lower stock price crash risk, concluding that the executives of these firms have a lower tendency to withhold material information from investors. The agency mechanism advocated in Kim et al. (2014) is consistent with a broad body of crash risk literature (e.g., Callen and Fang 2015; Kim et al. 2011) viewing agency-related problems as the key mechanism underpinning the formation of stock price crashes.

  2. Notably, while prior research suggests that CSR credentials influence investors’ decisions to buy stocks in firms, this does not imply that investors use CSR to make inferences regarding firms’ subjective discount rates.

  3. Compustat reports the most recent state and county of a firm’s headquarters. Even though firms may relocate during our sample period, any measurement error induced by such relocations is unlikely to be correlated with the strength of local religious social norms, and thus will bias against providing supportive evidence to our hypotheses.

  4. Focusing on a sub-sample of acquirers covered in the KLD database, Deng et al. (2013) report average announcement return of – 0.212 percentage points. When we limit our sample to acquirers covered in KLD, the average announcement return is comparable to the one reported by Deng et al. (2013).

  5. For expositional convenience, we report p-values for two-tailed tests. Notably, since our hypotheses are directional, inferences based on two-tailed tests provide a conservative estimate of the significance of our results.

  6. The data used to construct these additional controls were obtained from US Census Bureau, Federal Reserve Bank of St. Louis, RiskMetrics, SDC Spectrum, Execucomp, Audit Analytics, and IBES.

  7. This estimation approach has recently gained momentum in empirical research (e.g., Anderson and Core 2017; Diallo and Koch 2018; Ivanov et al. 2016).

  8. Prior studies (Attig and Brockman 2017; Harjoto and Rossi 2019) offer mixed evidence on the relationship between local religious norms and CSR.

  9. Specifically, we first estimate the probability of the M&A transaction taking place during the crisis period conditional on acquirer attributes and M&A transaction characteristics using a probit model. We then use the estimates of the probit model to calculate an inverse Mills ratio and include it as an additional control in the model we use to test Hypothesis 3.

  10. Quantile regression has been applied in a wide range of disciplines and has recently gained momentum in management literature. For reviews, see Koenker and Hallock (2001) and Li (2015).

  11. We use the robust standard deviation (measured as the interquartile range scaled by 1.349) instead of standard deviation in this analysis since the Relative size variable is significantly skewed in our sample.

  12. According to the most recent survey, 87% of religious adherents in the United States belong to either Catholic or Protestant denominations (ARDA 2010).

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Authors and Affiliations

  1. Melbourne Business School, University of Melbourne, Parkville, Australia

    Leon Zolotoy, Don O’Sullivan & Keke Song

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  1. Leon Zolotoy
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Correspondence to Don O’Sullivan.

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Appendix: Variable Definitions

Appendix: Variable Definitions

Variable

Definition

M&A announcement return

The acquirer’s cumulative abnormal return over the [− 1, + 1] days window around the M&A announcement date. We run a time-series regression of the acquirer’s daily stock returns on the market, size, value, and momentum factors over the [− 273, − 21] days window before the M&A announcement. We then use the coefficients from the time-series regression to estimate the acquirer’s daily abnormal returns as the out-of-sample regression residuals

Religious adherence

The ratio of the number of religious adherents in the acquirer’s county (as reported by ARDA) over the county’s population (as reported by the U.S. Census)

CSR

The acquirer’s CSR credential based on strengths and concerns of the six categories from the KLD database

GFC period

A dummy variable that equals to one for M&As announced between August 2008 and March 2009 and zero otherwise

Relative size

The ratio of M&A transaction value to the acquirer’s market value of equity measured at the fiscal year-end prior to the M&A announcement

Cash

The ratio of the acquirer’s cash and cash equivalents to total assets measured at the fiscal year-end prior to the M&A announcement

Size

The natural logarithm of the acquirer’s total assets measured at the fiscal year-end prior to the M&A announcement

ROA

The ratio of the acquirer’s net income to total assets measured at the fiscal year-end prior to the M&A announcement

Leverage

The sum of the acquirer’s long-term debt and debt in current liabilities divided by its total assets measured at the fiscal year-end prior to the M&A announcement

Market-to-book

The ratio of the acquirer’s market value of equity to its book value of equity

Illiquidity

The annualized Amihud’s illiquidity ratio of the acquirer measured over the fiscal year prior to the M&A announcement

Stock runup

The acquirer’s market-adjusted buy-and-hold return over the [− 206, − 6] days window prior to the M&A announcement

Past litigations

The number of class-action lawsuits filed against the acquirer in the period up to the M&A announcement date

Tender offer

A dummy variable that equals one for tender offers and zero otherwise

Hostile takeover

A dummy variable that equals to one for hostile takeovers and zero otherwise

All-cash

A dummy variable that equals one if the payment is made fully by cash and zero otherwise

All-stock

A dummy variable that equals one if the payment is made fully by acquirer stock and zero otherwise

Diversification

A dummy variable that equals one if the acquirer’s 2-digit SIC is different from the target’s 2-digit SIC and zero otherwise

Toehold

A dummy variable that equals one if the acquirer held the target’s shares at the M&A announcement and zero otherwise

Private target

A dummy variable that equals one if the target is a private firm and zero otherwise

Local antitakeover laws

The number of antitakeover laws that were adopted prior to the M&A announcement date in the acquirer’s state

Local social capital

The first principal component of the voter turnout in presidential elections, the census response rate, the total number of non-profit organizations and the total number of social organizations, normalized by county population

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Zolotoy, L., O’Sullivan, D. & Song, K. The Role of Ethical Standards in the Relationship Between Religious Social Norms and M&A Announcement Returns. J Bus Ethics 170, 721–742 (2021). https://doi.org/10.1007/s10551-019-04356-9

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