Political Influence, ESG, and Corporate M&As: Evidence in China

Government intervention in the corporate sector is a prominent feature in emerging markets like China, indicating that government officials play an important role in shaping corporate behaviors. Recently, environmental, social, and governance (ESG) has attracted extensive attention from policymakers and academics, extending the boundaries of traditional business operations and becoming one of the main objectives for firms' strategies. Existing studies have gradually shifted their focus on ESG and found that relevant ESG factors have two competing ways to affect corporate performance.1 Given the special nature of the Chinese institution, it is critical to understand the complex interaction in corporate capital allocation, sustainable performance, and political influence. Therefore, this thesis aims to investigate these key points in the Chinese setting in the following three chapters.

First, Chapter 2 investigates the impact of politicians' industry visits on M&A activities. This chapter proposes that visits signify political endorsement, affirming the legitimacy and compliance of visited districts' business environments. This chapter finds that these visits boost a firm's likelihood of becoming a target while reducing its inclination towards acquisitions. This effect is more substantial if non-Big 4 auditors audit the target firms, have less analyst coverage or have a smaller size. Additionally, these M&As increase shareholder wealth for acquirers and are usually associated with lower premiums, more post-M&A cash flows, and quicker completion.

Then Chapter 3 examines how political turnovers affect corporate green investments. By analyzing manually collected data on municipal government official turnovers in China from 2007 to 2020, this chapter discovers a notable increase in corporate green investments following these turnovers, aligning with resource dependency theory. The upswing in green investment results from both corporate initiatives and government influence. Companies that intensify green investments after political turnovers enjoy reduced taxes and increased subsidies. The impact of political turnovers on green investments becomes more pronounced amid economic and political uncertainties, particularly under externally appointed officials. This effect is particularly significant in the energy sector and non-state-owned enterprises (non-SOEs). Despite the observed surge in green investment activity post-turnovers, there is a tendency for these initiatives to subsequently decrease overall firm performance, likely due to the higher costs associated with green investments. This chapter contributes to our understanding of how political turnovers shape enterprises' sustainability practices and offers valuable insights for businesses navigating the implications of environmentally responsible development.

Finally, Chapter 4 investigates the role of ESG performance in shaping shareholder value during M&A processes. This chapter demonstrates that firms with robust ESG performance exhibit a heightened ability to fulfil their commitment to maximizing shareholder value. These findings align with stakeholder theory, which posits that organizations prioritizing ESG considerations are more likely to generate greater shareholder returns. Moreover, these analyses reveal that the positive impact of high ESG performance on valuation is magnified in cases where the acquiring firm is either a non-family business or a state-owned enterprise (SOE). Additionally, this chapter finds that the influence of corporate ESG performance on value creation becomes more pronounced when the acquiring firm boasts higher levels of transparency and a favorable reputation. This chapter contributes to the limited body of literature exploring the connection between ESG initiatives and M&A practices, as well as enriches our understanding of firm investment behavior and value creation, particularly within emerging markets.