Assessment

Section A

Mergers and acquisitions have emerged over time as a mode of entry into the business, and they

change from time to time to match the existing market needs. Corporate participation in mergers

and acquisitions may create value or not on the amount invested by the shareholders. Mergers

and acquisitions bring operational efficiencies, which may arise from economies of scale,

consumption economies of scope, production economies of scope, and improvement of resource

allocation hence affecting the shareholders positively (Kiesel, Ries and Tielmann, 2017). As a

result of mergers and acquisitions, an organization can also improve on the use of information

and expertise and improving the use of the brand name. Synergies created by M&A may result in

the more efficient management of an organization hence impacting the shareholders of that

particular company positively. Therefore, this essay will focus on the literature review of M&A

impact on the wealth of shareholders alongside explaining what may account for such wealth

effects.

Shareholders' wealth maximization is the key objective of any investor and corporate when

venturing into investments. However, the wealth of the shareholder may be affected by the M&A

form different perspectives (Hussan, S, Khoso, I.D. and Qureshi, F, 2020). From the word go,

M&A involves joining two firms to operate as one firm by either merging together or a predator

company acquiring the acquired company. The shareholders' wealth is affected in a way that

shareholders’ value from the large company which is acquiring other firms may dilute and

decrease in value. This is because the acquired company may have few assets which cannot add

more value to the new company. Arguably, shareholders’ wealth from the acquired company

may positively impact if the predator had a stable financial operation.

shareholders. The shareholders may be afraid of losing control over the company when another

company acquires its shares. In the case of M&A, shareholders become psychologically prepared

that returns on their investments may reduce. The wealth of the shareholders will also be

controlled by other people who may misuse it. The wealth of the shareholders is put at risk when

the two firms are merging (Sachdeva, T, 2017). The shareholders' value may be diluted hence

reducing their dividends being paid lower amount of dividends as paid in the previous years.

Many shareholders have lost their investments as a result of M&A hence making it riskier for

organizations to engage in such activities.

Mergers and acquisitions may also be beneficial to shareholders’ wealth despite being bad news

to them. For instance, the announcement of cross-border acquisition provides more and higher

returns than those for domestic. The wealth of the shareholders might therefore increase when

the new company/ firm can give them more returns than expected. The cumulative abnormal

returns (CARs). In the case of cross-border acquisitions are permanent hence making the

shareholders earn constant returns. We can therefore tell that the wealth of the shareholders is

stabilized when an effective M&A takes place.

Studies on the post-merger acquisition reveal that shareholders are likely to make positive and

abnormal profits/ returns hence increasing the shareholder’s wealth. However, the cumulated

abnormal returns may not have strong significance at the time of M&A, and this makes the

shareholders doubtful about the event. Information relating to merged and acquired firms is

limited because most of the firms taking part in M&A are not listed hence unable to track their

operations. Accounting data from the previous studies show that M&A has a positive impact on

the wealth of the shareholders by increasing the number of assets and returns. Empirical
evidence on the M&A shows that the shareholder’s returns of the acquired firms are likely to

improve when acquired. The mixed conclusions about the impact of M&A on the wealth of the

shareholders make its performance to be more complex. The negative returns caused by M&A

are not significant on the shareholders' wealth as the value of an investment will have been

diluted (Kioko, Kiweu and Nzioki, 2018). However, a positive reaction on the returns of the

company after the announcement of the M&A may make the company more sable in terms of the

shares and stocks hence improving the value of the firm. This consequently leads to an increase

in the wealth of the shareholders by getting more returns.

The combination of two or more firms may result in the reduction of cost as much as the

operations of the company are concerned. Most of the overlapping functions and facilities are

minimized when different firms are merged. Several studies show that a positive relationship

between M&A and predator results from factors like the market share, profitability of the

company, risk diversification and achievement of synergy for effective investments (Chen et al.,

2019). An organization with a positive review of the financial statement is likely to increase the

value of the shareholders’ wealth.

Mergers and acquisitions affect the growth of an organization by positively affecting its market

value. For instance, when an acquisition is announced, the amount of information transmitted to

the investors usually indicates the company's future success. This tells that the wealth of the

shareholders for the merging companies may increase and have a positive impact on the value of

the firm (Chen et al., 2019). The stock market reactions to the mergers and acquisitions also

affect the number of investments to venture into during the post-merger acquisition. Stock

market reactions to mergers and acquisitions may be helpful when communicating the future
value of the firm, and this makes it possible for the shareholders to plan on their investment plans

to maximize their wealth.

Conclusively, the value of the firm may increase or decrease after mergers and acquisitions.

Some studies record negative post-merger returns hence showing that the wealth of shareholders

are at risk when such an event takes place. However, other studies show that small acquirers may

experience significantly higher CARs hence improving their wealth in the company. Companies

conducting M&A events end up being one firm hence restructuring the wealth of the

shareholders.

Section B

Question Three: Corporate Social Responsibility

Corpora social responsibility involves the practice of integrating social and environmental goals

in the operation of the firm. CSR is significant in an organization as it directly impacts the

corporate financial performance of the firm. CSR, therefore, affects both the operations of the

firms and the shareholders/ investor despite adding value to society (Bose, Saha and Abeysekera,

2020). This essay will empirically reflect on the studies done concerning the relevance of CSR to

firms and their investors.

There is a positive correlation between CSR and financial Corporate financial performance of an

organization. Therefore, the firm which takes CSR into action when conducting its daily business

operations is likely to improve in its financial operations. As a result of business giving back to

society and fairly treating its stakeholders, there is a high probability of such an organization

stabilizing financially (Kim and Kim, 2018). A firm’s shareholders benefit directly from the

significance of CSR because when the finances of the company improve, their dividends and
returns increase. The shareholders will also have confidence in investing in the firm whose

financial operations are stable due to incorporating CSR in its operation. IT is also easier for

investors to project the firm's future earnings since the community and other stakeholders will be

in a position to support the company in one way or the other.

Ali et al. (2019) conducted the study to determine whether CSR had a significant influence on

the financial performance of Chinese firms. The findings from the research showed that financial

decision-makers relied on the CSR of many firms before deciding on which investment to

venture in. Therefore, the shareholders/ investors of an organization that conforms with CSR are

likely to get more returns (Nekhili et al., 2017). Furthermore, more investors are attracted to

firms that involve the concept of CSR in their operations, and this is significant for an

organization. People would wish to invest in companies that give back to society, protects the

environment, has anti-corruption measures, and adheres to the labors standard alongside rules

governing business operations.

In the study on CSR and shareholders value maximization, one can conclude that CSR increases

the firm's value. The earnings of the investors increase when the financial performance of an

organization is stabilized. Therefore, companies that participate in corporate social responsibility

activities expose their shareholders to good returns since the firm's financial performance

becomes stabilized. An organization should therefore align its corporate social responsibility to

increase/ maximizing the wealth of the shareholders. This is also best described by the

shareholder maximization theory as it describes how an investor can improve on their investment

statement strategies.

Corporate social responsibility rules enable an organization to maximize its revenues by

attracting more investors. CSR is based on the argument of maximizing the wealth of the
shareholders and the social welfare. CSR and corporate governance enable an organization to

achieve its long-term objectives of having a good relationship with society, governments,

shareholders, and other stakeholders. Stakeholders who are directly affected by the CSR of an

organization include the shareholders, the employees, suppliers, customers, government, and

business partners. An organization needs to treat each individual fairly for it to maximize its

revenues. Research shows that firms that fairy treats their different stakeholders fail are in a

position to improve on their business operations (Naseem et al., 2019). However, firms that do

not embrace CSR, i.e., involved in corruption activities, fail in their business operations as no

one may want to invest in their company.

Corporate social responsibility is used as a sign of accountability to investors. Through CSR, the

investors can easily follow up on how the firm utilizes its financial resources. One of the major

principles of CSR is accountability and openness in the daily business operation of the company.

It is expected that the stakeholders of an organization will not engage in corruption activities and

any other forms of practices that may expose the company to unethical practices. Therefore,

more investors will be attracted to make their investments in an organization that is accountable

for using the available resource.

Firms that apply CSR practices in their organizations are likely to retain and attract more

employees hence increasing the output. Concerning the CSR principles, employees are supposed

to be treated well and fairly in assigning them duties, recruitments, and remuneration. Companies

involved in corruption activities when hiring new employees are likely to lose competent

employees as this is unethical. People would like to work in an organization that values their

inputs. Firms that comply with CSR guidelines can reimburse their employees on time hence

making it possible for productivity improvement (Naseem et al., 2019). Employees also increase
their morale while on duty, resulting in the production of quality products and services. Hence,

with CSR on the employees, a firm can improve its performance in the aspect of financial, social

and government regulations.

In general, corporate social responsibility plays a great role in improving the financial

performance of many organizations. Firms that incorporate CSR in their operations records

financial states that reveal stability in their finances. CSR enables an organization to save on

their cash as fewer costs are incurred to pay fines for unethical and unlawful practices in the

business. Studies show that companies that do not comply with the law, corporate governance,

and CSR practices pay more money in the form of fines hence having no cash to save. Arguably,

the shareholder’s value increases when an organization has made more savings. This positively

impacts the investor as more cash will be available for them to make profitable investments.

Furthermore, investors in a firm have a common goal of maximizing their wealth (Salvioni and

Gennari, 2017). Companies that initiate corporate social responsibility give their shareholders a

good platform to maximize their invested amount. Corporate social responsibility is therefore

crucial in the daily business operation of any organization as it benefits both the firm and its

shareholders.

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