Tracing environmental sustainability footprints in cross‐border M&A activity

Abstract

This study documents the first large‐scale empirical evidence on the effects of differences in countries' environmental sustainability (ES) on cross‐border merger and acquisition (M&A) activity. Using 34,088 cross‐border mergers across 44 countries, we find that greater ES differences between acquirer and target countries stimulate the intensity of cross‐border mergers. The acquirer firms experience higher cumulative abnormal returns around merger announcements and pay higher merger premiums. Consistent with the pollution haven hypothesis, results on value effect are more pronounced for M&A deals in highly polluting industries such as petroleum, transportation and mining. The results are robust to a battery of robustness tests.

Understanding the Relevance of Sustainability in Mergers and Acquisitions—A Systematic Literature Review on Sustainability and Its Implications throughout Deal Stages

“…Firms facing domestically high carbon risks could potentially outsource their carbon risks to foreign targets in developing countries with lax environmental standards [76]. Indicating a corporation's carbon risk plays a critically important role for developed country acquirers in M&A target decisions and supports the theoretical basis of the pollution haven hypothesis [94].…”

“…Relative Sustainability Implications for Bid Premium Ahmad et al [94] find that, especially for polluting industries, country-level environmental sustainability (ES) performance differences are associated with higher bid premia at a company level. Based on the pollution haven hypothesis (PHH) and its competing view, either acquirers attempt to potentially relocate polluting activities to a low ES country or, respectively, acquisitions in a high ES country can be viewed as the acquirer's commitment to various stakeholders, resulting in achieving instrumental support in gaining technology-induced competitiveness that yields higher shareholder returns.…”

“…Environmental and carbon risks are analyzed by further studies [76,94]. Findings indicate that greater country-level differences between the acquirer and target countries induce higher cumulative abnormal returns [94].…”

“…Environmental and carbon risks are analyzed by further studies [76,94]. Findings indicate that greater country-level differences between the acquirer and target countries induce higher cumulative abnormal returns [94]. Respectively, cross-border acquisition announcement returns are higher for high-carbon emission acquirers that acquire targets in countries with weak regulations and governance.…”

“…From an industry perspective, energy or carbon-intensive sectors will probably pay relatively more attention to environmental country or company characteristics [76,94], while intangible industries (e.g., service industries) might be more rewarded in transactions for social dimensions. Therefore, further disentangling of companies' sustainability pillar effects will be helpful to create transparency.…”