The Spillover Effect on CSR Engagement of Financially Constrained Firms: Evidence from the Mergers and Acquisitions Contexts

This study investigates the effect of mergers and acquisitions (M&A) conducted by firms with strong Corporate Social Responsibility (CSR) practices on non-target firms' CSR activities. Specifically, the research focuses on the responses of financially constrained non-target firms. Additionally, we examine their investment behaviors and earnings management strategies as reactions to external CSR pressures arising from M&A activities. Generally, financially constrained firms reduce CSR investments due to resource limitations. However, this study hypothesizes that external pressure from high-CSR acquirers may alter such incentives. Empirical analysis yields three primary findings. First, financially constrained firms increase their CSR engagement when faced with a high concentration of high-CSR acquirers in their industry. Second, this CSR spillover effect is stronger in highly competitive industries. Lastly, these financially constrained firms do not significantly adjust capital investments in physical assets but instead tend to engage in earnings manipulation. These results suggest that financially distressed firms strategically enhance CSR investments under external pressure, such as acquisition threats, as a defensive measure.