From greenwashing to green transformation: evidence from mergers and acquisitions

We investigate greenwashing in the context of mergers and acquisitions (M&As). Specifically, we explore whether acquirers with a history of greenwashing strategically acquire targets with relatively higher Environmental, Social and Governance (ESG) ratings to further cloak their poor ESG credentials or embark on a legitimate green transformation (“go green”). The paper also examines the market's reaction to M&A deals. We use an innovative ESG statistic to capture activities that deviate from a firm's stated ESG practices to study 489 M&A deals between 2006 and 2020. We examine market responses and analyze changes in acquirers' greenwashing behavior around the deal using regression models to test our hypotheses and identify a suitable instrumental variable to address potential endogeneity concerns. We further examine competing explanations for our results such as deal overvaluation and integration risks. Our findings reveal that acquirers with higher levels of greenwashing acquire targets with higher ESG ratings. While the market initially reacts negatively to deals reflecting skepticism of the transaction, acquirers significantly reduce their greenwashing levels by one year after the deal, suggesting a legitimate green transformation. We provide novel insights to both M&A and ESG literature by providing empirical evidence on how firms can leverage M&As to transform their ESG practices. It also highlights the market's perception of M&A deals and the potential for acquirers to improve their sustainability practices.