This study examines the extent to which the environmental performance scores of Japanese acquiring firms are correlated with premiums they pay in M&A transactions. Additionally, we explore whether premiums differ between domestic and cross-border acquisitions.
By employing Signaling Theory and Agency Theory, we analyze the mechanisms behind acquirers' strategic decisions in both internal and external contexts. We analyze 362 Japanese acquisition deals and classify them as domestic or cross-border, with most cross-border deals involving targets from the United States.
Our findings reveal that Japanese acquirers with higher environmental scores are more likely to pay higher premiums for their targets. Furthermore, our study shows that the relationship between acquirers' environmental scores and M&A premiums is more pronounced for cross-border targets than for domestic ones.
In contrast to previous studies that primarily focused on the target side, we specifically examined the acquirer side by investigating whether higher environmental scores of acquiring firms are associated with higher premiums paid for targets. We also provide insights into Japanese acquirers and cross-border acquisitions, in contrast to the majority of research that has focused on US firms.
1. Introduction
Corporate governance has garnered significant academic attention, particularly through the measurement of environmental, social and governance (ESG) scores and their positive impact on firm performance (Ho et al., 2024). Of particular importance is the environmental score, a subdimension of the ESG framework, as environmental risks stemming from acquirers' environmental incidents may exert a more pronounced impact on M&A transaction outcomes than social risks (D'Souza et al., 2024). Moreover, existing research on ESG aspects, as well as specifically on environmental scores in M&A, focuses on target firms rather than acquiring firms (Gomes and Marsat, 2018; Liu et al., 2024). This body of work suggests that higher ESG (environmental) scores among target firms are positively correlated with higher acquisition premiums. In other words, shareholders of better-governed targets tend to receive higher premiums during acquisitions (Gomes and Marsat, 2018).
In contrast, only limited research has examined the role of acquiring firms in M&A transactions (Hussaini et al., 2021; Krishnamurti et al., 2019; Nguyen et al., 2025; Teti and Spiga, 2023), and the findings are mixed. Krishnamurti et al. (2019), for example, argue that socially responsible acquirers with higher ESG – particularly environmental – scores tend to pay lower premiums, attributing this to a commitment to shareholder value creation and disciplined financial strategy. However, other studies suggest a positive relationship, finding that bidders with higher levels of corporate social responsibility (CSR) tend to pay higher premiums (Hussaini et al., 2021). Additionally, some research finds no significant direct effect of ESG (environmental) scores on M&A performance but highlights an indirect impact of CSR on premiums through acquirers' governance quality (Jost et al., 2022). These inconsistencies indicate that the influence of acquirers' ESG (environmental) scores on M&A premiums remains underexplored.
Therefore, this study aims to shed light on the acquirer's perspective (Stewart Investors, 2025), which we argue plays a crucial role in advancing environmental transitions (Zhou et al., 2022). In addition to exploring the direct impact of environmental scores on bid premiums, we take a more nuanced approach by examining variations in cross-border deals. To address this gap, we focus specifically on Japan, which presents distinct advantages over the predominantly US-centered literature (e.g. Ozdemir et al., 2022). Japan possesses unique business characteristics, even when compared to other Asian countries (Liu et al., 2022). Liu et al. (2022) highlight key differences in M&A activity across China, Korea and Japan, driven by industrial and national factors, despite convergence in human-related aspects. In Japan, companies are marked by high ESG (environmental) standards and a strong sensitivity to potential negative impacts (Fujitani et al., 2023). Liang and Renneboog (2017) find evidence that a firm's CSR rating (and also its environmental scores) is strongly correlated to its country's legal origin, suggesting that findings from one national context may not be universally applicable (e.g. Hussaini et al., 2021; Ozdemir et al., 2022, both focusing only on the United States). Furthermore, Japanese firms have long been active participants in M&A transactions (Recof, 2024), with the USA representing their most significant foreign market. This has led to a substantial number of cross-border acquisitions involving US targets. While considerable research has examined Japanese firms' foreign market entry (e.g. Chiappini and Viaud, 2021), to the best of the authors' knowledge, no previous study has comprehensively investigated the effect of environmental scores on the premiums paid by Japanese acquirers for both domestic and cross-border targets.
This study applies two theoretical frameworks, Agency Theory and Signaling Theory, to analyze both the internal and external dimensions of M&A transactions. Agency Theory addresses internal conflicts within acquiring firms, particularly between managers and shareholders (Hussaini et al., 2021). In contrast, Signaling Theory focuses on how acquirers convey credible information to external stakeholders, influencing market perceptions and behavior (Spence, 1973, 2002). Together, these frameworks provide a robust foundation for understanding how environmental performance shapes M&A decision-making processes (Chen et al., 2023). Our empirical findings reveal a positive relationship between acquirers' environmental performance and the premiums they pay, indicating that Japanese firms with higher environmental scores tend to offer greater premiums to target firms. Notably, this relationship is more pronounced in cross-border acquisitions involving foreign targets.
2. Literature review
2.1 Theoretical concept
Firms are increasingly integrating environmental considerations into their strategic decision-making processes. However, most existing research on the environmental component primarily focuses on its relationship with firm performance, which can be assessed using a variety of metrics (Tran and Nguyen, 2021). Research on acquisition premiums and target firms has shown that environmentally responsible companies (those with higher environmental scores) tend to receive higher premiums in M&A transactions (Gomes and Marsat, 2018). Environmental scores have become a central element in understanding the dynamics of contemporary business strategy, particularly in the context of M&A. Their importance extends beyond financial and operational outcomes and serves as an indicator of a firm's broader strategic orientation. The relationship between environmental performance and M&A activity has been widely examined (e.g. Cho and Arthurs, 2018; Xie et al., 2017), the empirical findings remain mixed and inconclusive. Acquisitions are often a favored strategy for firms seeking rapid diversification, enabling acquirers to swiftly integrate the operations and assets of target firms. However, this approach carries significant challenges and risks, including a high potential for failure (Xie et al., 2017). One of the most critical determinants of acquisition success is the appropriateness of the premium paid by the acquirer (Cho and Arthurs, 2018). Traditionally, the literature has cautioned against high acquisition premiums, warning that overpayment can undermine expected synergies and ultimately diminish firm value. In recent research, the acquisition premium is increasingly recognized not only as a critical performance indicator but also as a more precise and observable measure than broader M&A performance metrics (Gomes and Marsat, 2018). These authors argue that acquirers may be better equipped than the general market to assess a target's intrinsic value–particularly when it involves intangible assets–justifying higher premiums under certain conditions.
This study adopts Agency Theory and Signaling Theory to frame our analysis, particularly in understanding the premium payment behavior of Japanese acquirers. Agency Theory emphasizes the importance of ownership structure in aligning the interests of managers (agents) with those of shareholders (principals) (Jensen and Meckling, 1976). Within the M&A context, Nanda and Gopalaswamy (2024) identified three primary factors that shape agency costs: a firm's financial condition, its corporate governance structure and the characteristics of the acquisition deal. We use Agency Theory to interpret internal challenges during M&A transactions, particularly the conflicts that arise when managerial actions do not fully align with shareholder interests. For instance, as discussed in the Freeman–Friedman debate (Freeman, 1984; Friedman, 1970), managers may believe that stronger environmental initiatives enhance long-term firm value, while shareholders resist these efforts due to their associated costs. Nagasawa and Nagasawa (2021) further identify two forms of managerial behavior in the pre-merger phase such as free riding, where managers overspend under the assumption that others will bear the costs, and empire building, where managers pursue expansion to increase their own power or status. Building on this, we propose that strong managers who advocate for significant environmental investments may also be more inclined to pay higher premiums in acquisitions (Hussaini et al., 2021).
In contrast, Signaling Theory emphasizes how firms communicate key attributes, such as firm size, auditor type, profitability and industry context, to external stakeholders as part of their strategic disclosure practices. Originating from the work of Spence (1973), the theory posits that firms disseminate information to reduce information asymmetry between themselves and the market. Within the realm of CSR, a growing body of research has examined the signaling effects on environmental performance (Su et al., 2016). Environmental performance is increasingly viewed as a market signal that helps to reduce informational gaps between firms and their stakeholders (Su et al., 2016; Wang et al., 2023).
2.2 Hypothesis development
In recent years, companies have increasingly emphasized high environmental scores as a means of enhancing their corporate reputation (Teti and Spiga, 2023). Firms with strong environmental performance also tend to demonstrate distinct M&A behavior. For instance, Deng et al. (2013) find that mergers involving high-CSR acquirers (which also exhibit higher environmental scores) are typically completed more quickly and are less likely to fail than those involving low-CSR acquirers. Similarly, environmental performance has been shown to influence strategic corporate decisions, including those related to mergers and acquisitions (Teti and Spiga, 2023). Conversely, acquiring firms with weak environmental performance often fail to realize post-merger operational improvements (Teti and Spiga, 2023). These findings suggest that both high environmental scores and the premiums paid can serve as strategic signals to stakeholders.
However, much of the existing literature has focused primarily on the environmental performance of target firms and its effect on acquisition premiums (Maung et al., 2020). We argue that this focus should be extended to acquiring firms as well. Acquirers frequently operate under conditions of information asymmetry due to limited insight into the target's operations and value (Ozdemir et al., 2022). In this context, environmentally responsible target firms are able to send positive signals to stakeholders, including potential acquirers, with the intention of maximizing their valuation (Gomes and Marsat, 2018). Furthermore, we focus specifically on the behavior of Japanese firms, as environmental issues receive considerable attention in Japan's corporate sector (Ikuta and Fujii, 2025).
For acquiring firms, sending positive signals not only demonstrates a commitment to sustainability but also helps to build trust with other market participants. Research by Hussaini et al. (2021) on US firms supports this perspective, suggesting that acquiring firms may enhance their CSR (environmental) scores through strategic investments aimed at bolstering their market reputation. Firms with strong environmental performance may view paying a premium as a visible demonstration of their dedication to long-term growth and market trust. That signals their commitment to responsible practices and to the future benefits these practices may bring. As noted by Deng et al. (2013), the full benefits of environmental considerations may not be immediately recognized by market participants. Additionally, Berchicci et al. (2017) highlight that environmentally responsible acquirers can drive improved environmental outcomes in acquired targets. In this sense, the premium paid is not simply an economic cost but rather a strategic investment that sends positive signals to market participants, enhancing the bidder's legitimacy and competitive position within the industry. Berchicci et al. (2017) further demonstrated a connection between environmental capabilities and strategic decision-making, while Boone and Uysal (2020) showed that firms with high environmental standards tend to avoid acquiring firms with lower reputations, reinforcing the idea that environmental reputation plays a critical role in shaping acquisition decisions.
Internal factors within acquiring firms can also help explain the positive relationship between environmental scores and the premiums paid. M&A investments often reflect various motivations within the acquirer. According to Hussaini et al. (2021), managers may pursue environmental activities to enhance their personal reputation or secure personal benefits, which can correlate with higher premiums that may not necessarily align with shareholder interests. Thus, high environmental scores may also reflect agency motives, where environmental investments serve strategic objectives while also creating potential conflicts between managerial and shareholder interests. Building on the work of Gomes and Marsat (2018), we aim to provide a more comprehensive understanding of the environmental impact on M&A transactions for Japanese acquirers (see Figure 1). Based on these insights, we formulate our baseline hypotheses, proposing that higher environmental scores of Japanese acquirers are positively associated with the premiums they pay for target firms.
Japanese acquirers' environmental scores are positively correlated with the premiums paid.
We argue that the positive relationship between environmental scores of Japanese acquirers and the premiums they pay to targets is particularly pronounced in cross-border transactions. These targets mostly include US firms. The idea of comparing cross-border acquisitions with domestic ones derives from the fact that Japanese acquirers not only differ in their acquisition behavior (Liu et al., 2022) but also pay higher premiums for cross-border targets than for domestic ones (Bebenroth and Ahmed, 2021). On a global level, we contend that managers of firms that invest significantly in environmentally friendly technologies may act in ways that deviate from shareholder interests, as suggested already by Friedman (1970). Managers with decision-making authority who demonstrate a willingness to undertake substantial investments in environmental initiatives are likewise likely to exhibit a greater propensity to pay higher acquisition premiums, particularly in cross-border transactions. This tendency can be attributed to the heightened information asymmetry that typically characterizes cross-border deals, where acquirers face greater uncertainty regarding foreign targets than in comparable domestic transactions. As a result, the effect of higher premiums paid by acquirers with stronger environmental standards is more pronounced in cross-border deals. This effect is expected to be particularly pronounced for Japanese acquirers, as the geographic and cultural distance to foreign targets is typically greater than, for example, that faced by a German acquirer targeting a French firm located near its French border.
A similar rationale for higher premium payments by more environmentally responsible firms can be derived from the perspective of Signaling Theory. Japanese acquirers engaging in cross-border transactions, whether in the USA or other countries, face greater risks than in domestic deals. As a result, the reputation of the Japanese acquirer is more exposed to external market participants, including international competitors, than it would be in domestic transactions. Japanese firms are widely recognized for their distinctive corporate culture, which frequently cultivates a strong sense of commitment and dedication among both employees and managers. Managers operating within such a cultural context, particularly those associated with high environmental performance, may be more inclined to signal to the market that the prices paid for target acquisitions are fair and justified. Consequently, we posit that Japanese firms acquiring foreign targets are more likely to offer higher acquisition premiums when they exhibit stronger environmental performance. This relationship arises because superior environmental scores function as a credible signal of the firm's commitment to sustainability and its long-term strategic objectives. We propose the following hypothesis:
The positive association between Japanese acquirers' environmental performance scores and M&A premiums is stronger in cross-border transactions than in domestic deals.
3. Methodology
3.1 Data sample
Several sources were used to construct a panel of Japanese firms engaged in M&As. Following established practices in the ESG literature, we utilized the LSEG (formerly Refinitiv Thomson Reuters, SDC) database to retrieve data on M&A deals and firms' environmental scores. LSEG collects ESG scores, with the environmental score serving as a sub-score (LSEG, 2025). Our focus was on M&A deals announced between 2007 and 2023, specifically examining deals involving Japanese acquirers, who are known for their strong environmental initiatives and sustainability practices (Ashta, 2024). In particular, we concentrated on Japanese acquirers that acquired either domestic Japanese firms (domestic deals) or foreign firms, with US firms representing the largest number of cross-border deals and the most significant international acquisitions for Japanese firms (Tsuji, 2025). To ensure consistency, we only included deals marked as “completed” and excluded those within the financial industry (Gomes and Marsat, 2018). From an initial set of 553 deals, we refined the sample because of missing data for control variables to a sample of 414 acquisitions. We further excluded leveraged buyouts, spinoffs, recapitalizations, self-tender offers and repurchases. However, in line with previous research (e.g. Ma, 2023; Zrigui et al., 2024), we included acquisitions even if the 50% line was not crossed. The final dataset consists of 362 Japanese M&A transactions: 324 domestic and 38 cross-border deals, consisting of 19 US deals. Other cross-border acquisitions important in environmental and economic aspects were undertaken in Australia (9 deals), Malaysia (3 deals), Singapore (3 deals), Thailand (2 deals) and The Netherlands (2 deals). This dataset was carefully filtered to ensure the completeness of key variables and the alignment with the study's objectives.
3.2 Variable definitions
The dependent variable, M&A premium, represents the excess value paid by acquirers above the target's pre-announcement market value. Following Zrigui et al. (2024), we calculate the premium based on the target's stock price 4 weeks prior to the M&A announcement. This timeframe is selected to mitigate the effects of short-term market fluctuations and to ensure a more stable pre-announcement valuation. To address potential outliers in the premiums, we limit the premium range from 0% to 200%, thereby reducing the risk of distortion from extreme values (Bebenroth and Ahmed, 2023). The key independent variable is the “E” for the environmental score of acquirers, obtained from the LSEG database. These scores, ranging from 0 (lowest) to 100 (highest), are widely recognized as measures of firms' sustainability practices. For this study, the environmental scores are taken from the year prior to the M&A announcement to reflect the acquirer's environmental performance before the acquisition occurred. Environmental scores for domestic transactions had a mean of 55.52 and for cross-border transactions 63.73. Consistent with previous studies (Gomes and Marsat, 2018; Krishnamurti et al., 2019), we included several control variables. Acquirer Size is measured as the logarithm of the acquirer's total assets. For the consideration structure, we classified the payment methods into three categories: Cash Payment, Cash and Shares and Shares only. We control for the deal type, taking Stake Purchase as the reference group. Additionally, we account for the Deal Attitude, distinguishing between friendly and non-friendly deals. We include Cross-border as a dummy variable indicating whether the acquisition involves a foreign target or not. Finally, we apply year fixed effects and industry fixed effects to control for time and industry-specific factors (see Table A7-A10) [1].
4. Empirical findings
4.1 Sample characteristics
The dataset exhibits considerable variation in both M&A premiums and environmental scores. The highest variance inflation factor value was well below the conventional threshold of 5, indicating that multicollinearity is not a concern in our analysis. It is unsurprising that the variables differ between domestic and cross-border acquisitions (Table A10) [1]. Table A1 [1] reports the correlation matrix for the key variables included in the analysis. The environmental variable and the cross-border acquisitions exhibit a positive correlation with the acquisition premium, suggesting that higher values of these variables are associated with higher premiums. In contrast, acquirer size and stake purchase are negatively correlated with the acquisition premium, indicating that larger acquirers and transactions involving greater ownership stakes tend to be associated with lower premiums.
4.2 Regression models
We employ multiple Ordinary Least Squares (OLS) regression models to estimate the impact of acquirers' environmental scores on M&A premiums. To examine the direct effect of environmental scores on premiums, we apply the following model:
Table 1 presents the results from the OLS regression of acquirers' environmental scores on deal premiums. The results are reported in columns 1 to 4. Column 2 shows that environmental scores are positively related to bid premiums (β = 0.144; p < 0.05), confirming Hypothesis 1 at the 5% significance level. In other words, acquirers that place greater emphasis on environmental performance tend to offer higher premiums. As shown in column 3, we find that cross-border deals differ significantly from domestic deals (β = 10.513; p < 0.05), reaching the 5% significance level. The magnitude of the estimate further indicates that this difference is economically non-trivial. To test the moderation effect, we observe that firms with higher environmental scores pay more for cross-border acquisitions (β = 0.525; p = 0.05), indicating a positive relationship at the 5% significance level (see Figure 2).
Regression analysis
| (1) | (2) | (3) | (4) | |
|---|---|---|---|---|
| Acquirer Size | −0.701 | −2.121 | −2.235* | −1.94 |
| (1.129) | (1.299) | (1.293) | (1.293) | |
| Cash Payment | −17.904*** | −18.135*** | −15.901*** | −15.652*** |
| (3.563) | (3.545) | (3.665) | (3.646) | |
| Stake Purchase | −26.096*** | −25.416*** | −23.529*** | −23.092*** |
| (3.158) | (3.156) | (3.251) | (3.239) | |
| Deal Attitude | −3.571 | −2.573 | −1.287 | −0.181 |
| (5.363) | (5.353) | (5.353) | (5.348) | |
| Environmental | 0.144** | 0.135** | 0.105 | |
| (0.066) | (0.066) | (0.067) | ||
| Cross-border | 10.513** | −22.58 | ||
| (4.733) | (15.978) | |||
| Environmental * Cross-border | 0.525** | |||
| (0.242) | ||||
| Constant | 39.089*** | 45.105*** | 44.495*** | 41.752*** |
| (14.342) | (14.529) | (14.446) | (14.421) | |
| R2 | 0.319 | 0.328 | 0.338 | 0.348 |
| Year fix effects | Yes | Yes | Yes | Yes |
| Industry fix effects | Yes | Yes | Yes | Yes |
| Observations | 362 | 362 | 362 | 362 |
Note(s): * represents p < 0.1, ** represents p < 0.05, *** represents p < 0.01
The x-axis represents environmental scores ranging from Min to Max, and the y-axis represents premiums ranging from 10 to 60. The graph includes two lines: one for crossborder targets and one for Japanese targets. The line for crossborder targets shows a steep increase from about 10 to 65 as environmental scores improve. The line for Japanese targets shows a slight increase from about 20 to 30. This indicates that firms with higher environmental scores pay more for cross-border acquisitions compared to Japanese targets.Interaction effect between environmental scores and cross-border deals on premiums
The x-axis represents environmental scores ranging from Min to Max, and the y-axis represents premiums ranging from 10 to 60. The graph includes two lines: one for crossborder targets and one for Japanese targets. The line for crossborder targets shows a steep increase from about 10 to 65 as environmental scores improve. The line for Japanese targets shows a slight increase from about 20 to 30. This indicates that firms with higher environmental scores pay more for cross-border acquisitions compared to Japanese targets.Interaction effect between environmental scores and cross-border deals on premiums
4.3 Robustness tests
We conducted several additional robustness tests to validate the findings of our main analysis. Unlike our primary analysis, which measures the premium 4 weeks prior to the acquisition, in the robustness checks, we examined the premium one week before the deal. We found similar results for this shorter timeframe to support our hypotheses. Specifically, the direct effect (β = 0.119, p < 0.05) was supported. The moderating effect between environmental scores and cross-border acquisitions was moderately significant at the 10% level (β = 0.414, p < 0.10; see Table A2) [1].
We performed additional analyses by winsorizing our dependent variable, premium, to 2 and 98% and found consistent results. The direct effect was marginally significant with β = 0.115 (p < 0.10) and the moderating effect was significant at β = 0.496, p < 0.05 (Table A3) [1]. We also conducted a placebo test to confirm that the environmental variables are important factors to consider. Table A4) [1] presents the results, showing that neither the social variable alone nor the ESG variables as a whole significantly influenced premium payments in the sample. Furthermore, we conducted additional tests (4 weeks before the deal) by incorporating acquirer-related variables, namely acquirer net income and acquirer book value, and re-estimated the regressions. The results remained largely consistent with our main analysis. Specifically, the direct effect remained marginally significant (β = 0.128, p < 0.10), while the moderating effect was significant (β = 0.518, p < 0.05) (see Table A5) [1].
Furthermore, we conducted a Wu-Hausman test to assess whether endogeneity materially affects the main estimates. Test results suggest that environmental scores do not display statistically significant endogeneity concerns (0.897, p-value = 0.344). To further account for unobserved heterogeneity, we also conducted a two-stage least squares (2SLS) analysis. As an instrumental variable, we applied the Industry Average Environmental score (Zrigui et al., 2024). This score potentially influences environmental scores but not premiums. The industry average environmental score (as a leave-one-out industry average) was negatively and significantly associated with firm-level environmental performance in the first-stage regression, indicating strong instrument relevance. This suggests that firms' environmental performance deviates from industry-level benchmarks, consistent with heterogeneous responses to industry environmental conditions. As Table A6 [1] shows, the environmental score in the second stage (column 2) remains positive and statistically significant (β = 0.215, p = 0.05).
Based on these robustness checks and the main analysis, we conclude that Japanese acquirers with higher environmental scores tend to pay higher premiums for target firms, with this effect being more pronounced in cross-border deals.
5. Discussion, implications and limitations
While previous research has extensively examined the role of environmental factors in target firms (Gomes and Marsat, 2018), a notable gap remains in understanding how environmental performance influences acquiring firms, particularly with respect to the premiums they pay in M&A transactions. Our study addresses this gap by suggesting that Japanese acquirers with stronger environmental performance tend to pay higher acquisition premiums, with this effect being particularly pronounced in cross-border transactions. Accordingly, environmental performance not only plays a pivotal role in enhancing the acquirer's reputation and legitimacy but also materially influences the pricing dynamics of cross-border M&A deals.
This study extends our theoretical understanding in several key ways. It contributes to the growing body of literature on environmental scores and M&A transactions (e.g. Wang et al., 2023). First, by integrating Agency Theory (Jensen and Meckling, 1976) and Signaling Theory (Spence, 1973, 2002), this study offers a dual-theoretical perspective on the relationship between environmental scores and acquisition premiums. Our findings suggest that environmental scores serve dual purposes: as a strategic signal to external stakeholders and as an internal mechanism that shapes managerial decision-making during acquisitions. From the lens of Agency Theory, our results build on previous research suggesting that managers who invest heavily in environmental initiatives (resulting in higher environmental scores) are more inclined to pay higher premiums for target firms, potentially exceeding market expectations (Hussaini et al., 2021). We extend the literature by showing that environmental performance can drive managers to make acquisition decisions that may not always align with shareholder interests but reflect their personal or strategic goals, such as enhancing their own reputation or positioning the firm as a leader in sustainability issues. Moreover, our findings are consistent with Signaling Theory (Spence, 1973, 2002), which posits that acquiring firms may pay higher premiums as a signal of positive reputation and long-term commitment to sustainability. This signaling effect is not confined to external market participants but is also likely to extend to employees of the target firm, who may interpret the acquirer's behavior as indicative of a genuine commitment to responsible and sustainable practices. In this regard, the payment of higher premiums may function as a mechanism not only to enhance the acquirer's reputation in capital markets but also to cultivate goodwill, legitimacy and trust within the target organization.
Second, we contend a moderating effect on cross-border acquisitions. Our findings extend the work of Hussaini et al. (2021) for US firms by illustrating that Japanese acquirers adapt different strategies when taking over foreign firms instead of domestic ones. Specifically, we show that Japanese acquirers treat environmental scores as a strategic resource. This adds nuance to our understanding of how environmental considerations are integrated into M&A decision-making processes, highlighting the contextual factors that influence this relationship for Japanese acquirers.
Third, our research emphasizes the significance of examining the subcomponents of ESG rather than relying on the overall ESG score. As previous studies have pointed out (Gomes and Marsat, 2018; Teti and Spiga, 2023), these subcomponents, such as environmental performance, often have distinct effects on value creation and corporate strategy. By focusing specifically on environmental scores, we provide deeper insights into how environmental performance influences M&A premiums, as opposed to broader ESG metrics. This distinction facilitates a more nuanced understanding of how firms' environmental practices are associated with acquisition premiums in M&A transactions, reflecting their perceived commitment to sustainability. Furthermore, our study underscores the importance of shifting the focus from target firms to acquirers. Our findings suggest that the self-awareness of acquiring managers, particularly in terms of their environmental initiatives, can have a significant impact on the premiums they offer.
This study has important practical implications for both Japanese firm owners and managers involved in acquisition decisions. Given that the consequences of overpayment tend to be particularly pronounced in cross-border transactions, Japanese firms are advised to exercise heightened caution when acquiring foreign targets. There are several reasons why cross-border targets tend to command higher premiums compared with domestic deals. For many Japanese firms, acquiring a foreign target is often viewed as a strategic move to mitigate the challenges of a shrinking domestic market (Bebenroth and Chen, 2017). Especially, the USA represents a critical economic market for numerous international Japanese companies and such acquisitions are perceived as a means to expand sales and tap into new growth opportunities. Additionally, Japanese firms, particularly those with limited experience in foreign markets, may offer higher premiums to ensure a smoother market entry and to satisfy target shareholders' expectations. However, the risk of overpayment remains significant, especially for Japanese firms that overestimate the potential synergies or underestimate the challenges of integrating foreign targets. Managers must carefully assess the long-term strategic benefits of these acquisitions, balancing the potential for growth against the risk of excessive premiums that could erode shareholder value.
It is crucial to acknowledge that many Japanese subsidiaries abroad operate in a relatively isolated manner. In practice, foreign subsidiaries acquired by Japanese firms tend to function autonomously, with communication between the subsidiary and the Japanese headquarters often proving challenging, particularly when there is a lack of Japanese managers at the subsidiary level. Given these challenges, we strongly recommend that Japanese firms prioritize establishing robust lines of communication and building strong partnerships with foreign targets well before the acquisition takes place. The degree of pre-deal collaboration and cultural alignment should be factored into the final premium paid, as these factors can significantly impact the success of post-acquisition integration. To mitigate this risk, we recommend that Japanese acquirers undertake a comprehensive evaluation of the target firm's overall quality before proceeding with the acquisition. This evaluation, often referred to as due diligence, should go beyond financial or environmental metrics to include an in-depth assessment of key human resource factors, such as leadership stability, employee satisfaction and cultural compatibility.
It is important to acknowledge that our study has several limitations that could be addressed in future research. First, while our study focuses on Japanese firms, which offers a fresh perspective beyond the US-centric research that has dominated the field (Ozdemir et al., 2022), it is country-based. Our findings are valuable for understanding M&A behavior but limited in its geographical scope to Japan. Second, this study focuses exclusively on the acquirer side, primarily due to data constraints that limit access to information on target firms, including both environmental performance indicators and relevant control variables. Future research could examine multi-country samples to investigate firms in a specific industry. Moreover, studies focusing on multi-country cross-border acquisitions could incorporate more nuanced measures of distance, such as institutional distance. Such an approach would offer deeper insights into the role of environmental considerations in shaping the behavior of both parties in M&A transactions. Third, we rely on data taken from the LSEG database for our environmental scores, which may introduce potential biases. Although the data is widely used in the literature, we assume that the environmental scores provided by this database are accurate. Future studies should consider alternative data sources to cross-check the findings. Fourth, qualitative research would add significant depth to our understanding of the role of environmental scores in M&A transactions. Interviews with managers or case studies could uncover the underlying motivations and strategic considerations that drive the payment of premiums in acquisitions, offering richer insights beyond the quantitative analysis. Finally, we acknowledge that the network in which a firm operates could influence both the targets it acquires and the premiums it pays. Although cross-shareholdings have declined in recent years, firm networks known as keiretsu continue to remain prevalent in certain industries.
Note
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