Sustainability Incentives and Value Creation in Corporate Acquisitions

ABSTRACT

Using an extended international sample of domestic and cross‐border mergers and acquisitions (M&A), this paper provides the first comprehensive examination of the role of ESG‐linked executive compensation in the market for corporate control. The findings show that linking executive pay to ESG objectives is associated with significantly stronger post‐acquisition Environmental, Social, and Governance performance. In addition, ESG‐incentivized acquirers are more likely to finance transactions through green bond issuance, highlighting an important channel through which sustainability considerations shape corporate investment and financing decisions. Improved ESG ratings are, in turn, associated with economically meaningful increases in firm value following deal completion, with Environmental and Governance dimensions emerging as key drivers of value creation. However, these value gains are not immediately reflected in stock market reactions at the time of deal announcement, indicating that investors do not fully incorporate the long‐term benefits of ESG‐linked incentives contemporaneously. The findings are robust to multiple approaches addressing selection bias and endogeneity. The paper contributes to the literature on executive compensation, M&A, and sustainability.