Climate Change Salience and Firm Investment

Abstract

I hypothesize that firms are more likely to make investments that reduce their CO2 emissions intensity if the threat of climate change is more salient. To test this, I examine mergers and acquisitions (M&A) in the US from 2012-2021 and exploit exogenous variation in exposure to abnormally warm temperatures. Conditional on an M&A occurring, if the acquiror experienced abnormally warm temperatures at its headquarters within 6 months prior to the deal’s announcement, then the target has 15% lower estimated CO2 emissions intensity in the full sample of deals. The effect increases to 29% among deals where the acquiror has above median CO2 emissions intensity, as these are the types of firms most exposed to climate change transition costs. This paper shows that firms exhibit a behavioral bias known as attribute substitution in their adjustment to climate change, since they make an estimate of the impact based on local temperatures, an easily accessible proxy, rather than the true determining factors.

Keywords: Salience, Investment, Carbon Emissions, Climate Change, Mergers and Acquisitions

JEL Classification: D22, D91, G31, G34, Q54