Sustainable Synergies: ESG’s Impact on Employee Retention and Market Reactions during M&A

Abstract

This study explores whether environmental, social, and governance (ESG) factors influence post-merger integration outcomes, focusing on employee retention and stock market performance. Specifically, it investigates three ESG dimensions: external ESG scores, ESG alignment between acquirer and target, and ESG orientation as communicated in deal announcements. The central research question is whether these ESG-related characteristics support smoother post-merger integration in terms of workforce stability and investor response. To address this, the study analyses 342 European public-to-public M&A transactions completed between 2008 and 2023. ESG data from FactSet, combined with text-based classification of ESG orientation, is used to estimate the effects on post-merger employee and executive retention as well as cumulative abnormal returns (CARs). Regression models incorporate firm-level and deal-level controls and fixed effects to ensure robust inference. The findings reveal that external ESG scores do not significantly improve employee or executive retention. However, ESG alignment shows a delayed positive association with executive retention. ESG orientation demonstrates mixed effects. Moderate ESG signalling is associated with short-term executive stability, while market responses vary depending on timing and intensity. Notably, long-terms investor responses appear insensitive to ESG orientation. These results suggest that ESG-driven M&A does not systematically enhance integration success. Rather, its impact is contingent, time-sensitive, and role-specific. The study contributes to ESG and M&A research by distinguishing between externally-rated ESG performance and internal ESG orientation, and by highlighting the importance of credible and balanced integration narratives. (JEL C21, G34, M14)