Stemming the tide: Does climate risk affect M&A performance?

Abstract

AbstractWe examine the effect of climate change risks (CCR) on firms' decision of engaging in mergers and acquisitions (M&A) and M&A performance. In this study we use the responses by firms on ‘climate change‐related risks and opportunities’ of the Carbon Disclosure Project (CDP) survey and 1372 deals of US listed firms during 2010–2020. 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, our results also indicate that if acquirers with higher climate change risks choose to engage in M&A, it significantly reduces the announcement returns. 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.