Mergers and acquisitions as navigators of climate policy shocks: evidence from the NOx budget trading program

We examine how mergers and acquisitions (M&As) enable firms to adapt to climate policy shocks. Exploiting the adoption of the Nitrogen Oxides (NOx) Budget Trading Program (NBP) across US states as an exogenous shock, we find that firms with NOx-emitting plants subject to the NBP are more likely to engage in M&As, particularly through vertical integration. The effect is stronger among firms facing larger compliance cost increases, supporting the view that heightened regulatory burdens drive post-NBP acquisitions. Consistent with the cost-saving role of vertical integration, we show that NBP-induced vertical deals reduce production and distribution costs. Overall, our findings provide evidence that M&As serve as a rational response to climate regulation, revisiting the neoclassical view of acquisition motives in the context of environmental policy.