Challenge or opportunity: climate policy uncertainty and green merger and acquisition

The Real Options Theory and the Growth Options Theory offer contrasting views on investment under uncertainty, with the former seeing it as a challenge and the latter as an opportunity. Using data from Chinese listed firms from 2000 to 2023, this paper documents a positive relationship between climate policy uncertainty (CPU) and firms’ green mergers and acquisitions (M&As). Specifically, a one-standard-deviation increase in CPU is associated with an approximately 1.2 percentage point higher probability of undertaking a green M&A and 0.078 additional green M&As. Mechanism analysis provides evidence consistent with two proposed channels: higher CPU is associated with heightened environmental regulatory intensity and enhanced internal green governance. Furthermore, while green M&As under higher CPU are associated with stronger subsequent green innovation outcomes, we do not find corresponding evidence for financial performance. Our findings are more consistent with the Growth Options Theory than the Real Options Theory in the context of green M&As.