Stemming the Tide: Does Climate Risk Affect M&A Success?
Posted: 31 Jan 2023 Last revised: 16 Feb 2023
Date Written: January 28, 2023
Abstract
We examine the effect of climate change risks (CCR) on firms' decision of engaging in mergers and acquisitions (M&A). Using two-stage residual inclusion estimation for 1,118 deals of listed US firms during 2010-2020 and consistent with risk vulnerability theory, our evidence indicates that firms with higher CCR have a lower probability of engaging in M&As, after controlling for possible endogeneity. The effect is stronger for acquirers with higher climate change risks as it significantly reduces the announcement returns. Our results are robust to subsample tests on environmentally sensitive and non-sensitive industries. These findings suggest that extant measures of climate change risks should be rethought when evaluating M&A efficiency. More broadly, our paper provides causal evidence that managers need to integrate CCR into their formal risk management systems to avoid unsuccessful M&As.
Keywords: Climate change risks, mergers and acquisitions, risk vulnerability theory, background risk, CDP
JEL Classification: G10, G11, G34, Q52, Q54
Suggested Citation: Suggested Citation