“ESG factors in M&A in India: Performance and market insights from 2010 to 2023”

This study assesses the impact of mergers and acquisitions on Environmental, Social, and Governance (ESG) performance and market value of acquiring companies operating in India. Data were collected and analyzed from 69 M&A announcements from January 2010 to June 2023, sourced from the Bloomberg database. The analysis reveals a positive correlation between the post-merger market value of acquiring firms and their ESG performance, indicating that an improvement in ESG factors is associated with increased market value after mergers. Additionally, a positive correlation was identified between acquiring companies’ post-merger ESG performance and their target firms’ pre-merger ESG performance. This finding suggests that when acquiring a target firm with high ESG performance, the acquirer is likely to experience an improvement in its own post-merger ESG performance. Moreover, both the post-merger market value and ESG performance of the acquirer are likely to improve with the profitability and size of firms but will have a negative impact based on the leverage components of the acquiring firms.


INTRODUCTION
The growing importance of ESG factors in the global arena has encouraged both corporations and governments to enhance their practices in accordance with the principles of sustainability.In the same vein, the Indian capital market is quickly evolving in terms of ESG and sustainability.Recently, the Security Exchange Board of India (SEBI) has advised the top 1,000 listed companies based on market capitalization to disclose their ESG data in line with Business Responsibility and Sustainability Reporting (BRSR) Core 2023 (Joshi & Joshi, 2024;Nial & Parashar, 2024;Singhania & Saini, 2023;Firmansyah et al., 2023).The increased prominence assigned to ESG issues is highlighted by managers' increasing preference for incorporating ESG elements into their investment processes (Rahman & Wu, 2023;Zhou et al., 2022;Tampakoudis & Anagnostopoulou, 2020).As a crucial corporate endeavor, mergers and acquisitions (M&A) prompt various pertinent discussions in the financial and management spheres (Rahman & Wu, 2023).Thus, this study endeavors to explore how M&A affects ESG performance and market value of acquiring firms in India.
Mergers and Acquisitions in India have experienced remarkable growth and transformation in recent years, with sustainability considerations taking center stage for investors and corporations.A successful M&A transactions, companies, especially acquirers go through a variety of changes in different ways (Zhou et al., 2022;Tampakoudis & Anagnostopoulou, 2020).Post M&A, the acquirer frequently sees notable improvements in their financial and economic position.These improvements typically take the form of increased market share, reduced operating expenses, and successful counteraction of competitive threats in the industry (Nial & Parashar, 2024).Furthermore, these transformation processes go beyond the financial measures to include changes in ESG performance and variations in market values (Christensen et al., 2022;Tampakoudis & Anagnostopoulou, 2020).Similarly, in the context of Indian businesses, successful M&A agreements help to create value and improve the overall performance of the corporations.Consequently, this research meticulously investigates if the acquirer's ESG score has improved after the M&A agreement has been completed.
According to Cellier and Chollet, (2016), Tampakoudis and Anagnostopoulou (2020), and Chen and Xie, (2022), the rapid growth in socially responsible investment (SRI) has led to the integration of ESG factors in mainstream asset management.As of 2016, the Global Sustainable Investment Alliance reported a global total of $30.7 trillion dedicated to SRI strategies (Global Sustainable Investment Alliance, 2018; Tampakoudis & Anagnostopoulou, 2020).Among these funds, $19.77 trillion was overseen following an assessment process for unfavorable ESG-related issues, while $17.54 trillion integrated ESG factors into the financial analysis (Tampakoudis & Anagnostopoulou, 2020).Global ESG-related assets under management (AUM) size increased to a projected $41 trillion in 2022, according to a January 2022 analysis by Bloomberg Intelligence (Julot, 2023).Further, according to Bloomberg projections, by 2025, ESG assets could be worth over $50 trillion, or one-third of all AUM worldwide (Julot, 2023) Stakeholder theory provides a comprehensive framework for understanding the relationship between corporate social responsibility (CSR), company value, and corporate performance (Rahman & Wu, 2023;Tampakoudis & Anagnostopoulou, 2020).It serves as the theoretical bedrock for understanding how companies should consider and engage with various stakeholders, not solely focused on shareholders, but also encompassing employees, communities, customers, and the environment.It also emphasizes the idea that a company's success is intricately linked to its ability to balance the interests of all stakeholders, influencing thereby its overall value and performance in the long run (Tampakoudis & Anagnostopoulou, 2020;Porter & Kramer, 2006;Freeman, 1984).Moreover, stakeholder theory supports both SRI and the adoption of ESG-related corporate policies, and hence, this study employed stakeholder theory.
Overall, the present study sheds light on the evolving landscape of corporate responsibility and governance in India, with a focus on the role of ESG factors in shaping M&A outcomes, within the context of the Stakeholder theory.The study examines the impact of ESG parameters on M&As in India, for which, only 69 M&A cases were considered from 2010 to 2023, where both acquiring and target companies are listed firms.This is because ESG has emerged as a compliance factor within Indian corporations only in recent times, owing to this, many firms do not disclose ESG data.The data were taken from the Bloomberg database and analyzed using Pearson's Correlations and Multiple Regression Analysis.

LITERATURE REVIEW
The literature review explores the interplay between M&A, ESG factors, and corporate performance.It integrates finance, corporate governance, and sustainability theories, illustrating the multifaceted dynamics at play (Capelle-Blancard & Petit, 2017; Widyawati, 2020).While some studies highlighted the generally positive relationship between ESG activities and financial performance (Firmansyah et al H1: The acquiring firm's ESG performance will improve post-merger when it acquires a company with a stronger ESG performance.
H2: The acquiring firm's market value will improve post-merger when it acquires a company with a stronger ESG performance.
H3: The acquirer's post-merger market value will improve when post-merger ESG performance outperforms pre-merger performance.

Data description
However, before testing the above hypotheses, it was necessary to define the research variables and data.These defined variables are reflected in Table 1.
Using the detailed data framework as presented in Table 1, a series of crucial relative variables for empirical analysis was calculated.Subsequently, the same was substantiated with the hypotheses under investigation.Table 2 displays the variables utilized in the research, their symbols, explanations, and the formulas employed for calculation.The acquirer's leverage is defined by the ratio of total debt to total assets.The variable shows the post-merger leverage ratio value of the acquiring firm.The value is taken from the Bloomberg database

RESULTS
Table 4 provides the descriptive statistics of the variables used for the analysis.
As seen from Table 4, the target for acquiring firms' pre-merger ESG score was 0.800, which effectively indicates that the bidders tend to acquire target firms with lower ESG scores.It is specifically evident in the context of the Indian market since most Indian acquirers tend to be large firms that acquire lower-size target firms.Additionally, the ACQESG score was calculated to be 0.109, signifying an 11% increase in the ESG performance of the acquirer at the post-merger stage compared to the pre-merger stage.Notably, although there seems to be a marginal increase in the market value of the acquirer at the post-merger stage at 0.8%, the profitability is very high in terms of growth (i.e. over 100%).Moreover, the acquirer size seems to have increased by 40% in the post-merger stage, as compared to the pre-merger stage, while the leverage showed only 10% growth.
Largely, the analysis shows that Indian acquirers do tend to acquire firms that have lower ESG scores compared to acquiring firms.However, an acquirer's ESG performance does improve in the post-merger stage.The other control factors (i.e.profits, market value, and firm size) seem to have grown in the post-merger stage compared to the pre-merger stage.

Bivariate analysis
Table 5 shows the bivariate analysis between the dependent, independent, and control variables.
The bivariate analysis shows a high correlation be- A reduction in post-merger acquirer ESG performance and market value is observed with the increases in debt components, as indicated by the negative correlation between ACQ_Leverage with both ACQESG and ACQMV.
The bivariate analysis shows a significant and positive relation between
Largely, the results indicate that the acquirers' ESG scores improve on the acquisition of target firms with high ESG scores.However, acquiring ESG scores does reduce with the increase in the firms' debts.

Multiple regression analysis
Multiple regression examined the relationship between ( ) / TAR ACQ ESG performance, acquir- ers' ESG performance and market value changes, and acquirers' profit, size, and leverage.Three models (Model A, Model B, and Model C) were utilized to test the hypotheses, with detailed explanations of the variables used in these models.
Table 6 presents each model's regression coefficient and significance level using multiple regressions and adjusted R-squared values.Before applying the models, certain assumptions needed verification.The variance inflation factor (VIF) was employed to identify potential multicollinearity issues, and the test values of VIF were all below 1.5 for each model, indicating the absence of multicollinearity.
Subsequently, the Durbin-Watson method was used to assess potential autocorrelation issues.The test values and falls were within the range of 2 (±0.5), confirming the absence of autocorrelation (Malhotra & Birks, 2007).To examine the heteroscedasticity of the model, the studentized Breusch-Pagan test was applied, the null hypothesis, indicating homoscedasticity, was accepted in all models.
The normality of residuals was tested using the Shapiro-Wilks test, indicating the normality of the standardized residuals.The adjusted R2 values for the three models, reflecting the predictive ability of the models, are 0.19, 0.19, and 0.141, respectively.

Model A
H1: The acquiring firm's ESG performance will improve post-merger when it acquires a company with a stronger ESG performance.
The variables in the study were: Dependent variable: ACQESG.
From Model A, it may be noted that there is indeed a positive relation between ( ) / TAR ACQ ESG (β = 0.162) and ACQESG, which is statistically significant at the 1% level.However, ACQ_ Leverage negatively relates to ACQESG (β = -0.082).The regression analysis shows that there is a positive relation between post-merger acquirers' ESG in relation to pre-merger target ESG at 0.162, statistically significant at a 1% level.Hence, from the results, it is asserted that the post-merger ESG performance of acquirers is indeed contingent on the pre-merger ESG performance of the target firm.In light of these findings, Hypothesis 1 is accepted.

Model B
H2: The acquiring firm's market value will improve post-merger when it acquires a company with a stronger ESG performance.
The variables in the study were: Dependent variable: ACQMV.

TAR ESG ACQ
In Model B, a negative relationship is observed between ACQMV with ( ) / TAR ACQ ESG (β = -0.098),which is statistically significant at a 5% level of significance.Moreover, the ACQ_ Leverage negatively relates with 1% level of significance.The regression analysis shows that there's a negative relation between the post-merger acquirers' market value with relation to pre-merger ESG value of target firms at -0.098, and statistically significant at the 5% level.Based on these results, Hypothesis 2 may be rejected.

Model C
H3: The acquirer's post-merger market value will improve when post-merger ESG performance outperforms pre-merger performance.
The variables in the study were: Dependent variable: ACQMV.
In Model C, a positive relationship is observed between ACQMV and ACQESG (β = 0.018) but is not significant at a 5% level of significance.Also, ACQ_Leverage does have a significant negative relation with ACQMV.The regression analysis shows a positive relation between post-merger acquirers' market value in relation to their ESG performance.However, within a post-merger scenario, the acquirers' market value does have a negative relation with the debt portion of acquiring firms.Based on these results, Hypothesis 3 is not rejected.
Table 6 shows the results of multiple regression analysis between the dependent variables ACQESG, and ACQMV with the independent and control variables, ( ) /, TAR ACQ ESG along with the acquirers' profitability, size, and leverage.

DISCUSSION
This study examined the influence of M&A on ESG performance and market value of acquiring companies operating in India.Based on the findings, it has been now established that acquiring firms significantly improve their ESG performance following a merger when integrating targets with superior premerger ESG performance.This suggests a readiness to implement and incorporate ESG principles by firms in their daily operations.These findings support earlier research by demonstrating that acquiring socially conscious targets does enhance the environ-mental and social performance of acquiring firms through voluntary CSR measures (Firmansyah et  Further, this study showed a positive relationship between the two variables, ACQMV and ACQESG, in terms of evidence of enhanced market value for an acquiring company when purchasing a target with superior ESG performance.Therefore, the results are in line with earlier research, which contributes to the conversation about the valueenhancing effects of SRI (Firmansyah et al., 2023;Xie et al., 2019).However, because different CSR dimensions have multifaceted implications, it is difficult to make exact conclusions in terms of the specific aspects of a target firm's ESG performance, and how they affect the acquirers' performance Given the use of aggregated ESG ratings, this could account for the findings involving target/acquirer ESG performance and market value, which have a moderate level of significance.Future studies may delve deeper into this.
The results show a significant and positive relationship between the acquiring firms' post-

CONCLUSION
This study examines the effects of M&A announcements on the ESG performance and market value of acquiring companies in India, analyzing 69 M&A announcements spanning from January 2010 to June 2023, where both acquiring and target firms were listed.The data sourced from the Bloomberg database reveal that acquiring firms experience an improvement in ESG performance upon acquiring targets with superior ESG performance.Furthermore, the results show a positive correlation between the post-merger market value of acquiring firms and their ESG performance, which shows the close link between the improvement in ESG factors and an upsurge in the market value of acquiring firms post-mergers.These findings imply that the acquiring firms can bolster their ESG performance and market value by targeting companies with robust ESG performance.
This study provides both theoretical and practical implications.In the context of M&A activity, this study reaffirms the association between corporate value creation and ESG performance.The findings imply that acquiring firms can enhance their ESG performance by acquiring targets with higher ESG performance.This is consistent with the stakeholder perspective, which suggests that business measures intended to satisfy different stakeholders' needs -including those pertaining to environmental, social, and governance (ESG) concerns -can result in improved company performance and value generation.The study also emphasizes how crucial it is to take ESG elements into account as strategic assets when making M&A decisions, emphasising how sustainability factors influence business plans and results.
The study's findings are of interest to managers, investors, and policymakers.They equip them with insights to make well-informed decisions in this domain.The study supports that SRI is a strategy to enhance the value of the firm for managers.Therefore, investing in firms with better ESG performance not only positively affects the firm's ESG performance but also improves the firm's market value.Additionally, it is recommended that policymakers encourage companies to disclose information about their ESG performance and support the implementation of ESG practices.
Ultimately, this study contributes to a deeper understanding of the intricate relationship between M&A activities, ESG performance, and market value, paving the way for more informed and sustainable business practices in India's corporate landscape.However, the study confronts a significant constraint due to the limited availability of ESG data, as numerous Indian companies refrain from disclosing ESG-related information publicly.This hampers rating agencies' ability to assign ESG scores, given their heavy reliance on publicly accessible data.Yet, the recent regulatory directives issued by SEBI in July 2023, mandating ESG parameter disclosure under BRSR Core, promise to ameliorate this challenge, facilitating future research on ESG in India.Moreover, the study's reliance on aggregate ESG disclosures instead of individual ESG factors for firms underscores the need for future research exploring the impact of specific ESG parameters on M&A outcomes, offering deeper insights into this realm.
(Kumar & Firoz, 2022;Ray & Goel, 2023)novations, Volume 21, Issue 2, 2024 corporate financial performance (CFP) in the Indian energy sector in their research.Investors, fund managers, policymakers, and energy company managers are assisted in navigating ESG investment strategies and identifying optimal lag periods to maximize the advantages of enhancing firm value.Further, in the Indian context, improved CFP is contributed by enhanced ESG disclosures, bolstering the company's image and credibility, and fostering ethical corporate practices(Kumar & Firoz, 2022;Ray & Goel, 2023).Empirical investigations in the past confirmed that the evolution of the SRI market has led to an increased emphasis on ESG reporting and the ex- ., 2023; Al-Shaer & Zaman, 2019; Muñoz-Torres et al., 2018), others revealed nuanced findings, such as negative associations between ESG scores and financial outcomes in specifhttp://dx.doi.org/10.21511/imfi.21(2).2024.25 importance of CSR in shaping market perceptions and assessments of M&A outcomes on a global scale.Interestingly, Fatemi et al. (2017) did not observe any significant improvements in the longerterm effects of mergers on an acquiring firm's ESG performance.The relationship between CSR, risk reduction, and firm value underscores the favorable effects of CSR.It emphasizes the potential for even more substantial impacts on companies with high levels of product differentiation (Dyck et al., 2019).1.2.A comprehensive analysis of Indian firms and sectors A comprehensive understanding of ESG dynamics in Indian firms and sectors involves engaging stakeholders, integrating ESG into business strategies, implementing reporting systems, and prioritizing long-term value creation.A long-term positive association between ESG disclosure and share price was established, suggesting ESG scores as emerging indicators for future financial performance and risk management strategies, with implications for policy and stakeholder decisionmaking in India's evolving economy (Ray & Goel, 2023).A link between ESG and financial performance in India was revealed by the research, shifting focus to a company-centric perspective and emphasizing ESG's role in enhancing shareholder value and the imperative of integrating ESG considerations into corporate strategies (Vidhi, 2023).Behl et al.(2022) observed a correlation between ESG factors and pansion of widely accepted metrics to quantify ESG performance.ESG metrics serve as substitutions for gauging sustainability performance and are viewed as codified indicators of CSR and sustainability.Studies suggest that stakeholders place a higher value on a company's ESG performance when it is reported, and companies publishing ESG reports tend to have higher stock market returns.However, the boundaries between CSR, sustainability, and ESG performance remain relatively vague.Researchers have tried to explore the relationship between ESG performance and the financial performance of organizations and their findings highlight the significance of ESG considerations in corporate decision-making.Similarly, the literature on M&A emphasizes value creation through increased corporate efficiency and access to resources as key drivers for business consolidations.Past studies have identified a positive relationship between enhanced ESG performance with improved corporate performance of acquirer firms, potentially serving as a value-creation factor.Thus, this study inves-

Table 1 .
Data and variablesThe acquirer's market value is defined by Tobin's Q value.Tobin's Q is measured as the ratio of market value divided by the book value.The variable shows the postmerger market value of the acquiring firm.The value is taken from the Bloomberg database The acquirer's profit is defined by the net profit of the company.The variable shows the pre-merger net profit of the acquiring firm.The value is taken from the The acquirer's profit is defined by the net profit of the company.The variable shows the post-merger net profit of the acquiring firm.The value is taken from the The acquirer's size is defined by the book value of the assets of the company.The variable shows the pre-merger book value of the acquiring firm.The value is taken from the Bloomberg database The acquirer's size is defined by the book value of the assets of the company.The variable shows the post-merger book value of the acquiring firm.The value is taken from the Bloomberg database The acquirer's leverage is defined by the ratio of total debt to total assets.The variable shows the pre-merger leverage ratio value of the acquiring firm.The value is taken from the Bloomberg database (2) acquirer's market value is defined by Tobin's Q value.Tobin's Q is measured as the ratio of market value divided by the book value.The variable shows the premerger market value of the acquiring firm.The value is taken from the Bloomberg database Investment Management and Financial Innovations, Volume 21, Issue 2, 2024 http://dx.doi.org/10.21511/imfi.21(2).2024.252.2.SampleFurthermore, the analysis was restricted to M&A transactions in which both target and acquiring companies had the ESG data.Most of the sample

Table 2 .
Data and variables used for analysis

Table 3 .
Sample selection for the study Less a number of acquisitions where both the acquiring and target firms are not listed on the Indian Stock Exchange 19867 Total number of M&As, in India, including investments, announced from Jan 2010 to June 2023, including partial acquisition, which are complete and both acquiring firms and target firms are listed 655 Fewer samples were rejected due to multiple acquirers and target firms, buybacks, exchange offers, unknown investors, private investors, etc. 298 Total number of M&A, in India, including investments, announced from Jan 2010 to June 2023, including partial acquisitions, which are complete, and both acquiring firms and target firms are listed 357 Less sample firms for which ESG data were not available 288 The total number of samples considered, which includes all M&A, in India, including investments, announced from Jan 2010 to June 2023, including partial acquisition, which is complete, and both acquiring firms and target firms are listed and ESG data available 69

Table 4 .
Descriptive statistics of all variables TAR ACQ ESG which indicates that the acquirer's ESG scores improve on the acquisition of target firms with higher ESG scores.The results indicate that at the post postmerger stage, the acquirer's ESG scores show significant improvement, as compared to pre-merger scores, which is majorly affected by the pre-merger ESG scores of the target firm.