This study analyzes the impact of leveraged buyouts (LBOs) on firms’ environmental, social and governance (ESG) commitments.
This study uses a comprehensive sample of LBO target firms and their comparable firms to empirically examine the link between LBO and ESG policy using a sample of US firms from 2010 to 2023.
Contrary to the hypothesis that companies under the LBO have higher ESG levels, our results reveal that these companies exhibit lower ESG scores than their comparable firms immediately prior to the LBO deal. Looking at the post-deal period, we find a significant decrease in the ESG commitment of the target firms.
The post-deal reduction in ESG commitment can be attributed to greater financial constraints. The heightened financial pressure stemming from the use of substantial debt to finance the LBO leads companies to prioritize short-term profitability over long-term sustainable investments. These findings underline the importance of close monitoring of ESG practices in LBO transactions by investors, regulators and other stakeholders to promote sustainable and responsible corporate management in the long term.
