The impact of firm-specific climate change exposure on vertical integration

Firm-specific climate change exposure, which captures market perceptions of climate change-related risks and opportunities faced by a firm, has important implications for firm decisions. However, it remains unclear how such exposure may affect firms' buy-versus-make decisions in supply chains. Our study addresses this research gap by drawing on the theoretical lens of Transaction Cost Economics (TCE) to examine vertical integration as a strategic response to firm-specific climate change exposure. Following the TCE logic, we further investigate the moderating roles of geographic diversity and financial stability. Using panel data from 1395 publicly listed U.S. manufacturing firms from 2007 to 2020, our analysis shows that firms with higher climate change exposure are more likely to pursue vertical integration. Moreover, this effect is stronger for firms with more geographically dispersed operations and greater financial stability. Overall, our findings highlight the importance of perception-based climate change exposure in shaping firms’ boundary decisions, providing important implications for both research and managerial practices.