“Deal, Baby, Deal”: Environmental Mergers and Acquisitions

Abstract

Environmental considerations increasingly shape corporate merger and acquisition (M&A) decisions. Although environmental deals, on average, do not outperform non-environmental deals, those initiated by energy firms deliver higher cumulative abnormal returns averaging 4.9 percent over the three days surrounding the deal announcement. We identify and validate two channels. Through a physical risk diversification channel, bidder firms diversify operations from disaster-prone regions into less vulnerable areas, with returns highest when bidder and target facilities are located in areas with contrasting climate hazard exposures. Consistent with a regulatory risk mitigation channel, acquirers enhance compliance with environmental regulations and cut greenhouse gas emissions after completing an environmental deal. Energy firms are also more likely to pursue environmental M&As following exogenous increases in regulatory pressure, with such deals producing higher returns. Finally, using a quasi-experiment involving bids withdrawn due to antitrust reasons, we show that terminations of environmental deals elicit negative abnormal returns, erasing the positive gains from the initial deal announcement.

Keywords: environmental disclosure, merger and acquisition, physical climate risk, regulatory risk, energy regulation, M&A conference call

JEL Classification: M14, Q20, Q40, Q50, G34