Shifting Away the Pressure: How Does Local Air Quality Induce Pollution‐Driven Acquisitions?

This paper examines the impact of local air quality on firms’ acquisition decisions. We find that polluting firms in areas with better air quality are more likely to acquire targets in more polluted areas. We show that regulatory pressure, normative pressure, and organizational legitimacy concerns are three possible channels through which local air quality influences polluting firms’ acquisition decisions. Meanwhile, firms are more inclined to undertake pollution‐driven acquisitions when they are financially capable of doing so or when they cannot alleviate the pressure via environmentally responsible ways. Moreover, the presence of foreign institutional investors and the Covid‐19 pandemic attenuate the impact of local air quality on polluting firms’ acquisition decisions. In addition, firms conducting pollution‐driven acquisitions experience negative short‐term market reactions and unfavorable long‐term performance in profitability and productivity but receive higher subsidies from the local government after the pollution‐driven acquisitions. Our results suggest that polluting firms engage in acquisitions to shift the environmental legitimacy pressure away.