Greening the future: How mergers and acquisitions in China tackle carbon challenges

For various reasons, carbon-intensive firms in emerging markets are constrained to pursue cross-border acquisitions. This paper examines domestic mergers and acquisitions (M&As) as a carbon-offsetting strategy among carbon-intensive firms in China. We find that high carbon-emitting firms are more likely to engage in domestic M&As. Stricter environmental regulations amplify this effect. Additionally, these firms display higher risk profiles, characterized by elevated betas, idiosyncratic risks, cashflow volatility, and accounting return volatility due to the substantial transition risks associated with pollution control expenses. These firms opt for M&A activities to mitigate these risks, acquiring low-pollution or green innovation-focused targets. M&A announcements result in higher returns performance than low-carbon risk acquirers, indicating the value-enhancing impact of decarbonizing M&As. State-owned enterprises, financially stable firms, and those with stronger corporate governance tend to engage in M&A deals to address carbon risk.