Does the LBO Deal Affect the Firm's ESG Commitment in Financial Distress Situation ?

Fidèle Balume (), Jean-François Gajewski () and Tao-Hsien Dolly King ()
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Fidèle Balume: MAGELLAN - Laboratoire de Recherche Magellan - UJML - Université Jean Moulin - Lyon 3 - Université de Lyon - Institut d'Administration des Entreprises (IAE) - Lyon, Iaelyon - Iaelyon School of Management - UJML - Université Jean Moulin - Lyon 3 - Université de Lyon
Jean-François Gajewski: MAGELLAN - Laboratoire de Recherche Magellan - UJML - Université Jean Moulin - Lyon 3 - Université de Lyon - Institut d'Administration des Entreprises (IAE) - Lyon, Iaelyon - Iaelyon School of Management - UJML - Université Jean Moulin - Lyon 3 - Université de Lyon
Tao-Hsien Dolly King: The University of North Carolina at Charlotte

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Abstract: This study examines how the leverage buyout deal and the subsequent increase in the financial distress risk (FDR) for firms under LBO affect the firm ESG commitment. A panel data analysis is applied on 182 buyouts and 500 comparable firms from USA between 2006-2022. The first result indicates that firms that are selected for buyout have a significantly higher social engagement and lower governance engagement prior to the LBO deal compared to the post-deal period. In addition, we observe a significant slowdown in the increase of the ESG commitment for buyouts compared to their peers in the post-deal period. The second result from a multivariate analysis indicates that neither the FDR nor the LBO deal (considered in isolation) affect the firm's ESG commitment. However, depending on its size and the increase of its FDR, the firm under LBO decreases its ESG commitment, i.e the bigger a firm under LBO is, the more likely the firm tends to reduce it's ESG commitment when facing with a higher financial distress risk. This result is specifically linked to firms under LBO, as when we run the same regression on comparable firms, we find no evidence of relation between the increase in the financial distress risk and ESG commitment of comparable firms depending on their size. Conversely, an increase in the risk of financial distress does not prevent comparable large firms from increasing their social commitment. Consistent with the salience theory, this study provides new empirical evidence of the wealth transfer hypothesis in buyouts.

Keywords: Buyouts; Financial distress; ESG commitment (search for similar items in EconPapers)
Date: 2024-04-03
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Published in Clermont Financial Innovation Workshop - 2024, ESC Clermont Business School, Apr 2024, Clermont - Ferrand, France

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