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Risk-shaped cognition: How climate-risk bias influences corporate M&A decisions

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  • Tian, Ye
  • Chen, Heng

Abstract

This paper examines how managerial climate risk perception bias influences corporate M&A pricing. We construct firm-level climate risk perception bias by comparing objective meteorological data with climate-related disclosures. The results show a strong and persistent positive association between perception bias and acquisition premiums, after controlling for alternative climate exposures, extreme weather events, carbon risk, and endogeneity concerns. Mechanism tests reveal that the availability heuristic, information anchoring, and corporate carbon risk jointly reinforce the premium effect. The impact is more pronounced for pollution-intensive firms, firms in climate-sensitive industries, and firms operating in regions with weaker regulatory or informational environments. Overall, the findings suggest that behavioral distortions play a meaningful role in strategic financial decisions under climate uncertainty. Improving climate-risk transparency and strengthening governance may help reduce bias-driven mispricing and support more efficient capital allocation in the future.

Suggested Citation

  • Tian, Ye & Chen, Heng, 2026. "Risk-shaped cognition: How climate-risk bias influences corporate M&A decisions," Economic Modelling, Elsevier, vol. 161(C).
    • Handle: RePEc:eee:ecmode:v:161:y:2026:i:c:s0264999326001768
    DOI: 10.1016/j.econmod.2026.107647
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    Keywords

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    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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