As executives look to keep their jobs and their reputations, the growing threat of a takeover causes widespread panic in boardrooms. To protect themselves, managers often focus intensely on short-term financial metrics to make the company look as profitable and efficient as possible.
An interesting 2026 study titled “Takeover vulnerability and ESG overinvestment disciplines“ Researchers Abongeh Tunyi, Ruth O. Sagay, and Reon Matemane dive deep into this exact conflict. The study asks a critical question: Does corporate takeover vulnerability affect a firm’s environmental, social and governance (ESG) decisions?
To understand how companies react under stress, the researchers looked at a huge dataset: 19,564 firm-year observations from 2,545 US-listed companies (NYSE and NASDAQ) spanning 25 years from 1994 to 2019.
Researchers base their research on two main theories of business psychology:
Agency Theory: This theory suggests that managers are human and often act in their own self-interest. As takeover threats threaten a manager’s career, they become “myopic,” meaning they focus obsessively on the short term. They will reduce long-term investments – such as R&D or ESG – just to increase short-term returns and look worthwhile to investors.
Resource Dependence Theory: This theory states that companies depend on outside resources (such as capital and cash) to survive. When the threat of a takeover arises, financial uncertainty increases. To survive, companies scale back on discretionary spending (things that are “nice to have” but not strictly necessary) to conserve cash.
ESG practices lose out to takeovers
When firms face high takeover threat, they systematically reduce their engagement in ESG initiatives compared to firms that are safe from takeovers. This makes sense. ESG requires a lot of discretionary spending, and the financial benefits of these projects often take years to materialize. While you might be fired next month, you won’t be worrying about a debt that’s five years away.
Companies that brag loudly about their massive ESG initiatives may be building “ESG credit.” The data shows that these are exactly the same companies that will secretly cut those budgets the moment Wall Street applies pressure.
“As a firm’s vulnerability to a takeover bid increases, its ESG performance declines in the following year“
For each unit increase, a company’s vulnerability to a takeover decreases social The pillar is more than double (-3.060 units) compared to the Environment pillar (-1.267 units) or the Governance pillar (-1.553 units).
Social initiatives, such as community building and employee diversity programs, are heavily focused on the long term. When external pressure mounts, these long-term community investments are usually the first things to be thrown overboard to keep the ship afloat.
One of the most interesting concepts to study is the concept ESG Additional Investments And ESG Credit.
Some companies spend significantly more on ESG—more than would be expected for a company of their size and industry. Sometimes, it’s just that a CEO pursues pet projects to enhance their own personal reputation, which the study refers to as “agency-driven personal advantage or symbolic behavior.”
When these companies maintain high ESG investments over time, they build what researchers call “ESG credit”—a stockpile of goodwill capital and stakeholder goodwill. It is basically an insurance policy made up of good vibes.
Who lags behind the most in ESG?
The study found a very interesting dynamic: The negative effect of takeover vulnerability on ESG engagement is stronger among firms that have previously overinvested in ESG..
If a company has already done the bare minimum to comply with the law, they won’t be able to cut much without getting sued. But if they invest too much, they have a lot of “fat” to trim.
Because they have built up “ESG credits” over the years, they can immediately reduce their ESG budgets without losing public trust or causing a backlash.
Cutting too many ESG costs actually makes the CEO look incredibly disciplined to Wall Street investors. This shows the market that managers are cutting wasteful costs and focusing squarely on shareholder value, which helps prevent takeovers.
Strong governance can act as a shield for valuable ESG projects. The researchers found that firms led by highly capable managers and backed by large institutional investors (such as large mutual funds) tended to be significantly weaker in reducing ESG.
Great managers and active, big investors know the difference between “fluff” ESG (projects just for good PR) and “strategic” ESG (projects that actually reduce risk and strengthen the company over the long term). When a takeover threat hits, these high-powered leaders don’t just panic and cut everything. Instead, they strategically prune low-value fluff while protecting ESG programs that truly add value to the company.
When a CEO has extensive power over their board of directors, they are more likely to panic and cut long-term projects to save their own jobs. Research has shown that ESG cuts are significantly deeper when CEOs exert stronger control over boards.
The study noted an interesting demographic trend based on previous research, which suggests that female directors and executives tend to be more risk-averse and conservative in corporate decision-making. In a high-stakes takeover environment, this risk-aversion increases the pressure to show pure financial discipline. As a result, firms led by a female CEO, or firms with a critical mass of female directors, actually reduce ESG spending more aggressively In response to the threat of occupation. As amazing as this Board with more women Tendency to invest more in ESG initiatives.
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This post was Previously published in Little Green Myths.
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