SSRN Id4084779

Emission Trading Schemes and Cross-Border Mergers
and Acquisitions
Yajie Chena , Kun Guob , Qiang Jic and Dayong Zhang∗a
a Southwestern University of Finance and Economics
b University of Chinese Academy of Sciences
c Institutes of Science and Development, Chinese Academy of Sciences
Abstract
The emission trading scheme (ETS) provides a market mechanism to mitigate

carbon emissions and has been introduced in many countries. Its fundamental idea
is to make carbon emissions costly. Consequently, firms undertaking cross-border
expansions may have to consider this extra cost when entering markets with an
ETS. They may relocate their investment to countries without ETS. Using a large
sample of international firms between 2002 and 2019, we investigate this issue via a
difference-in-difference approach. Our results show that ETS implementation leads
to significantly less cross-border merger and acquisition (M&A) deals in the host
countries, indicating possible carbon leakage. Further analysis shows that ETS im-
plementation decreases firms’ financial performance and increases market risks, both
contributing to relocation decisions. We demonstrate clear evidence of cross-sectoral
differences, where carbon-intensive sectors tend to bear higher costs. This study
contributes to the climate finance literature and provides evidence with clear policy
relevance.
JEL: F21, G32, G34, Q54

Keywords: Carbon emission; Climate policy; Cross-border M&A; Emission trading
schemes; Transition risk.
∗
Corresponding to: 555 Liutai Avenue, Chengdu China, 611130. Email: dzhang@swufe.edu.cn
Electronic copy available at: https://ssrn.com/abstract=4084779

1 Introduction
It is generally believed that climate change has become the greatest threat to global
sustainable development. Higher global surface temperature is associated with more fre-
quent extreme weather events, leading to significant social and economic losses worldwide
(Carleton and Hsiang, 2016). Evidence shows that the rising level of greenhouse gases
(GHGs) in the atmosphere is the main cause of global warming (Lashof and Ahuja, 1990).
It also shows that carbon dioxide emissions due to anthropological activities is the largest
contributor among all GHGs. Recognizing the importance of controlling global warming
and GHG emissions, especially carbon dioxide emissions, the UN Framework Convention
for Climate Change (UNFCCC) was operationalized in the 1997 Kyoto Protocol, leading
to the movements towards a broader global coalition to date. In fact, climate change
is occurring much faster than expected. The sixth assessment report by the Intergov-
ernmental Panel on Climate Change (IPCC) suggests that climate change is “rapid, and
intensifying” 1 ; thus, urgent actions are needed to control global warming under the 1.5 ◦ C
target, which is set by the Paris Agreement to curb the global temperature rise of 1.5 ◦ C
above pre-industrial levels in the 21st century. Many countries have recently committed
to carbon neutrality by the middle of this century, though the path to this objective is
challenging and not entirely clear.
One of the important actions to meet the Kyoto commitments was to introduce the idea
of emission trading scheme (ETS) in 2000 by the European Commission. The European
Union (EU) ETS was adopted in 2003 and started to operate in 2005. As a “cap-and-
trade” system, the EU ETS was designed to be a cost-effective and economically efficient
mechanism to deal with climate change. Since the launch of the EU ETS, a similar
system has been adopted by over 30 countries, including the US, China, Japan and a
number of other main industrial economies (for a list of the countries and the year when
they adopted ETS, please refer to Appendix A, Table A1). Adding other carbon-pricing
1
https://www.ipcc.ch/2021/08/09/ar6-wg1-20210809-pr/

initiatives, such as carbon tax, 65 countries in total are involved as of 2021, according to
the World Bank2 . Although there are differences in the actual ways of operation in each
country, the fundamental principles of ETS are the same, that is, to limit carbon dioxide
emissions and establish a market for carbon. When the carbon price is set and allowances
are auctioned, an ETS charges extra costs for polluters and generates revenues for green
participants. As a consequence, ETS implementation can directly increase the costs to
firms. The cost of an ETS is obviously not limited to the carbon-intensive sectors. For
example, the power generation sector may have to pay the extra cost, but the cost will be
passed through industrial chains to other sectors, which will also generate indirect costs
(Bui and de Villiers, 2017). Together, the performances of firms in a market with and
without an ETS can differ.
Realizing the fact that not all countries have implemented an ETS, we expect that
ETS adoption may affect international capital flows or firms’ decision to invest in other
countries (i.e., via cross-border M&As). In fact, di Giovanni (2005) shows that the cross-
border M&A is one of the main approaches used by multinational enterprises (MNEs)
to allocate resources across the world. Both the value and the quantity of global cross-
border M&As have grown over time in recent years, making them increasingly important
channels for international capital flows. For example, the net value of global cross-border
M&As was $507.3 billion in 2019, equivalent to a 46.2% growth relative to 2010, while
the number of cross-border M&A deals increased by 28% to 7,118 cases over the same
time period (UNCTAD). For these MNEs engaging in international investment, ETS
implementation in the host countries can increase operational costs, which may affect
their initial decision to invest in those countries, or they may relocate their investment
to other countries without an ETS (relocation effect). For the firms already in the host
countries via cross-border M&As, their financial performance could also be affected, which
would influence their future investment decisions. Market risk is another major concern
when MNEs establish their investment portfolios across the world. We know that climate
2
https://www.worldbank.org/en/programs/pricing-carbon

policies can bring uncertainties in the form of climate transition risks (Battiston et al.,
2021). Moreover, the establishment of a carbon market can raise risks through a spillover
effect to other financial markets (Tan et al., 2020), altogether imposing extra challenges
to MNEs’ cross-border investments.
In their recent study, Bartram et al. (2022) have investigated the real economic im-
pacts of a climate policy, in particular, how the implementation of California’s ETS affects
firms’ behaviours in the US. They have found that financially constrained firms tend to
relocate their production outside the state when responding to the ETS implementation,
whereas firms without financial constraints do not change their emissions. In general,
firms’ regulatory arbitrage can undermine the target of a climate policy. Form this per-
spective, our study shares some fundamental similarities with the research of Bartram et
al. (2022), but we take a global angel to investigate the extent to which ETS adoption
can affect firms’ cross-border investment decisions and their associated performance. This
study is also in line with the existing literature that shows that government policies can
bring uncertainties and pose a major challenge to cross-border M&As (Hsieh et al., 2019).
In practice, we noticed that the EU has recently approved the Carbon Border Ad-
justment Mechanism (CBAM)3 , which will impose extra costs on a targeted selection of
imported products. The basis for this arrangement is to avoid carbon leakage or pre-
vent the relocation of production against more ambitious EU climate policies. Under
the CBAM, targeted products will be subjected to a carbon price that follows the EU
carbon-pricing rules. For those non-EU producers that have already paid the carbon price
in their local carbon markets, the extra cost can be deducted. The mechanism can af-
fect international trade and especially relevant to developing countries, though its climate
benefits would be limited4 . Despite the remaining controversy (Lim et al., 2021), the EU
CABM was passed and will be implemented in 2023. Whether the new mechanism is really
needed and how serious carbon leakage is at the international level require more evidence.
3
https://www.consilium.europa.eu/en/press/press-releases/2022/03/15/
4
See the UNCTAD news at: https://unctad.org/news/eu-should-consider-trade-impacts-new-climate-
change-mechanism

If the problem is universal, then all other countries with an ETS should also introduce
a similar mechanism. More information about the underlying mechanisms is needed for
policymakers to react accordingly. Therefore, our study is practically important and can
provide valuable evidence to the debate on this adjustment mechanism.
Given that not all countries have implemented an ETS, its impact on cross-border
M&A decisions can be studied by using a difference-in-difference (DID) approach. Taking
ETS implementation as a quasi-natural experiment, we can study whether and to what
extent this type of climate policy can affect the scales of cross-border M&As, in other
words, whether there is a relocation effect and how serious it is. To do so, we use a sample
of 186,170 cross-border M&A deals in 155 host countries from 2000 to 2019 to perform
the empirical analysis. The firm-level information can be aggregated to test the macro-
level impacts, and it also allows us to delve into sectoral differences. More importantly,
we can use this information to test for the cost channel by exploring firm-level financial
performance in response to ETS implementation.
To summarize, our empirical results support the hypothesis that introducing ETS in
a country can significantly reduce the scale of cross-border M&As in that country, thus
confirming the existence of the relocation effect. In other words, firms tend to react to
a climate policy by relocating their investment, causing carbon leakage and undermining
the policy’s effectiveness. For those companies that entered a country with an ETS, our
results show that these firms have lower financial performance; therefore, a cost channel
exists. Our findings also show that ETS implementation can raise the level of risks, which
also contributes to investment relocation. We do identify clear sectoral differences in both
scale and performance in response to ETS implementation. Carbon intensive sectors tend
to bear higher cost, but other sectors are also affected through the indirect cost pass
through. Our results are robust to a number of additional analyses.
In general, this research makes a number of important contributions to the literature.
First, it is an interdisciplinary study covering three subjects, namely climate finance,
international business and corporate finance, which bring forward new insights into the

study of upfront issues from an international perspective. Second, our findings provide
new evidence on the economic impacts of climate change. Our study demonstrates that
government climate policies can affect MNEs’ decision to engage in cross-border M&As,
which constitute an important form of international capital flow. Third, our study es-
tablishes both cost and risk channels that help in understanding the relocation effect due
to ETS adoption. Last but not least, our research has important policy implications
for countries that have already introduced an ETS as a market mechanism to mitigate
carbon dioxide emissions. For their own interest, the CBAM should also be established
following the EU practice, though the overall impact on international capital flow is un-
clear and worth further investigation. The results presented here can also provide critical
information for those countries that plan to introduce more stringent climate policies.
We have structured the remaining sections of this paper as follows: in Section 2, we re-
view the relevant literature and establish an analytical framework for the empirical study.
Testable hypotheses are developed accordingly. Data sources, variables and descriptive
statistics are presented in Section 3, where we also explains our modelling strategy. In
Section 4, we report our empirical results and discuss our findings in line with our hy-
potheses. Robustness checks and further analyses are covered in Section 5. Finally, in
Section 6, we concludes the paper.
2 Literature Review and Hypothesis Development
Since the launch of the EU ETS, its set of economic impacts, especially on firms’ invest-
ment decisions, has become a hot topic in the empirical literature(for surveys of relevant
studies, see, e.g. Brohé and Burniaux, 2015; Joltreau and Sommerfeld, 2019). An ETS
brings extra transaction costs to firms or introduces the cost of carbon (Chapple et al.,
2013), which can affect the firms’ performance or competitiveness, leading to changes in
their investment decisions. With a global consensus on the urgency to cope with climate
change, more countries have introduced their own ETSs or are on the way to developing

such schemes. Studies on non-EU ETS and its impacts on firms’ behaviour also appear in
the literature. For example, Zhu et al. (2020) find that firms tend to trade strategically in
order to gain financial benefits from ETSs in China. Bartram et al. (2022) provide clear
evidence that firms tend to engage in regulatory arbitrage by relocating their investments
from regions with ETSs to those without any.
In fact, a large volume of the literature on the determinants of cross-border M&As
(e.g., Erel et al., 2012; Xie et al., 2017) shows that country-specific factors matter for
M&A decisions, for example, institutional factors and policy uncertainties (Gregoriou
et al., 2021; Paudyal et al., 2021). Recently, climate factors have appeared under this
subject and are found to be relevant to cross-border M&A decisions (Semenenko and
Yoo, 2020). Given the existence of significant cross-country differences in climate policies
and different levels of exposure to climate risks, cross-border M&As are expected to have
strong country-specific features when the parties involved respond to climate influences.
Combining the discussions on the cost of an ETS to firms and the literature on cross-
border M&As, we argue that ETS implementation in a host country can add costs to
MNEs planning to invest in that country, and can thus reduce the scale of cross-border
M&As and cause investment leakage (Koch and Mama, 2019). We interpret this as a
relocation effect–similar to the findings of Bartram et al. (2022) in the sense that MNEs
may choose to relocate their investment to countries without an ETS (Babiker, 2001),
and test it at the international level. The first testable hypothesis is therefore stated as
follows:
H1 (Relocation effect). The implementation of an ETS in host countries reduces
the scale of cross-border M&As.
According to another strand of literature, cultural distance (Morosini et al., 1998),
economic distance (Liou and Rao-Nicholson, 2019), institutional distance (Li et al., 2020)
and other country-specific factors have been found to affect cross-border M&A perfor-
mance. Some studies have shown that climate policies can have a strong influence on

firms’ financial performance (e.g., Liu et al., 2021; Maung et al., 2019). Given that an
ETS can generate extra costs to firms, it will thus decrease their financial performance.
In other words, if there is a cost channel, then we expect that ETS implementation will
reduce the financial performance of the firms entering that market.
On one side, emission trading imposes direct costs on the firms included in the system.
On the other side, firms that are not included yet may have to face the possibility of future
inclusion, and thus need to prepare for the consequence, which brings indirect costs. Lund
(2007) introduces another indirect cost in the sense that the added cost to the power sector
(covered in the ETS) tends to raise the electricity price; as a consequence, even firms not
covered by the ETS may also bear higher costs. While the direct cost is obvious, indirect
costs to the private sector from a country’s emission policies are not entirely clear and thus
lead to a strand of empirical research. For example, in their investigation of the economic
impacts of energy taxes and the EU ETS on a sample of European firms from 1996 to
2007, Commins et al. (2011) show that both investment behaviour and profitability of
these firms are affected. Nguyen (2018) takes Australian firms as examples and provides
empirical evidence that carbon risks can reduce firms’ performance. Bose et al. (2021)
examine whether carbon risks affect corporate M&A decisions, and they find that target
countries’ characteristics can affect returns on investment. Following these discussions,
we can derive the following hypothesis in the form of a cost channel or performance effect:
H2a (Cost channel). The implementation of an ETS in host countries lowers the
financial performance of firms entering those markets through cross-border M&As.
In addition to the cost channel, the real effects of climate policies can influence firms’
behaviour by bringing in uncertainties. An ETS may create a signal to a market that
stronger climate policies may follow. For example, a broader national ETS may follow the
introduction of the regional pilot programmes. In the EU ETS, the carbon market has
become stricter and more formal in going through its three stages. The carbon tariff in
the CBAM will surely shape the international market, while its impacts are not entirely
clear. These policy uncertainties are often considered climate transition risks, which may

affect the stability of financial systems (Battiston et al., 2021; Semieniuk et al., 2021).
Investors in both the financial markets and the equity markets may respond to this type of
climate risk by changing their behaviour (Giese et al., 2021; Reboredo and Otero, 2021).
ETS implementation can also add to the general economic policy uncertainty (EPU) in
a country, which can reflect changes of risks in the whole market (Brogaard and Detzel,
2015).
The establishment of a carbon market also adds uncertainties to the entire market.
Carbon prices vary over time, and the fluctuation can be magnified through derivative
markets (e.g., carbon futures). Essentially, financial investors involved in both carbon
markets and other financial markets build a cross-market linkage. Market dynamics and
associated risks in the carbon market can spread to other financial markets through this
mechanism, leading to price co-movements and risk spillovers (Tan et al., 2020; Yuan and
Yang, 2020). As a consequence, there could be a risk channel that explains the effects of
an ETS (Helseth et al., 2020), which results in the hypothesis below:
H2b (Risk channel). ETS implementation can affect cross-border M&As by in-
creasing the level of risks in the host country.
3 Data and Model
3.1 Data Description
To investigate the role of climate policies (represented by ETS implementation) in cross-

border M&As, we have collected the main firm-level data from the BVD-ZEphyr Global
M&A Transaction Analysis database. Firm-level financial performance and other charac-
teristics are from the BVD-Osiris Global public company analysis database. Our sample
period is 2002-2019. The information on ETS implementation and other country-specific
information are all obtained from the World Bank. For country-level risk measures, we use
the International Country Risk Guide (ICRG) dataset, a popular dataset used frequently

in the literature (see, e.g., Hoti and McAleer, 2004).
To clean the original data, we follow existing literature (Rossi and Volpin, 2004; Lin
and Jia, 2020). Specifically, all deals whose status is ‘Completed’ or ‘Assumed completed’
are included in our sample. A deal is kept if the acquiring firm owns less than 50% of the
target company’s stock before the deal, and more than 50% after the deal. After cleaning,
we end up with a total of 186,170 deals in 154 host countries. Among these countries, 36
had an ETS during the sample period, and 118 had no ETS. Given that around 60% of
the deals have no information on value, we can only use the number of deals rather than
their monetary values to represent the scale of cross-border M&As in a particular country.
In fact, that should sufficiently serve our purpose as we are interested in relocation effects
and performance effects; large-scale M&A cases in terms of monetary value may generate
bias in our questions. The sample distribution across countries is plotted in Figure 1.
(Insert Figure 1 here)
To capture the differences in the sample countries with and without an ETS, the colour
green is used to highlight the countries with an ETS where the size of the spot indicates
the number of cross-border M&A deals. Obviously, the US, the EU and China are top
M&A destinations, though we need to note that during the sample period, the US and
China only implemented regional or pilot ETSs. China’s national ETS was implemented
in 2021, but that is beyond our sample period. Since we are interested in the impacts
of ETS implementation, Figure 2 plots the number of deals around the year of ETS
implementation in the US, the EU, China and other countries with an ETS.
We can clearly observe upward trends of cross-border M&As, which are consistent
with the worldwide development pattern of cross-border M&As. In Figure 2, year 0 is
when the ETS was implemented, including both national and regional ones. The only
exception is China, where the upward trend remains two years after the implementation of
10

the pilot ETSs in 2013, the rest o the countries with an ETS have experienced immediate
slowing down. We have to realize that even in China, the pilot ETS was implemented in
steps. Only four out of seven pilot programmes were implemented in 2013.
Table 1 reports descriptive statistics at both the country level (Panel A) and the firm
level (Panel B). In Panel A, Deals refer to the natural logarithm of cross-border M&A
deals (plus 1) in a country. WGI denotes the world governance index. Income is also the
natural logarithm of per capita GDP. Growth signifies the GDP growth rate. Resource is
the measure of resource endowments (the share of ore and metal exports in merchandise
exports (%). Trade measures openness and is the share of exports and imports over
GDP. The Vulnerability index measures physical risk exposure to climate change. The
country-specific risk measure includes the main index (T-risk). Three subcategories are
also considered: E-risk refers to economic risks, F-risk denotes to financial risks, and P-
risk signifies to political risks. The higher the index, the lower the level of risk in each
category.
In Panel B, ROA refers to return on assets (%). Size is the natural logarithm of
market capitalization. Age is the natural logarithm of the firms’ age. Leverage signifies
the debt-to-equity ratio (%); Cash denotes to the ratio of cash flow to total assets (%).
These are all the typical control variables used in the existing literature. We will discuss
our results later, referring to relevant studies. For more information about these variables,
please refer to Appendix A, Table A2.
(Insert Table 1 here)
After removing the missing values, the effective sample size here for countries is 2,453
(country-year observations), whereas the sample size at the firm-level is 55,512 (firm-
year observations), covering 6,678 acquiring firms from 72 countries. The number of
observations will change later in the regressions subject to model specifications. On
average, the number of cross-border M&As per country per year is around 14 deals (2.64
in log term). The statistics reported in Table 1 are based on winsorized samples at 1%
11

and 99% levels.
3.2 Model Setup
Taking ETS implementation as a quasi-natural experiment, both the relocation effects

and the underlying channels implied by H1 and H2aH2b, respectively, can be examined
through the DID approach. For the relocation effects, we aggregate the cross-border M&A
deals according to the host countries, and the hypothesis H1 indicates that countries with
an ETS have a lower number of deals compared with countries without an ETS. The
model can be specified as follows:
Yit = α + β1 ET Sit + γXit + λi + δt + ηit + εit (1)
where Yit denotes the total cross-border deals in host country i during year t (in log
form); ET Sit is a dummy variable equals to 1 if an ETS is implemented in country i at
time t; and Xit refers to a set of country-specific control variables. We also control for
country and year fixed effects, ηit represents a country-specific linear trend to control for
an unobservable time-varying trend.
The DID setup for the cost channel is slightly more complicated as it is based on
firm-level data. For any host country i, the treatment group consists of firms entering
that country before the implementation of an ETS, and firms never entering countries
with an ETS are comprise the control group. In other words, we exclude sample firms
entering a country with an ETS after the year of implementation. For example, if a
firm enters the EU through cross-border M&As after 2005 (the year when the EU ETS
was implemented), it is excluded from our analysis. Doing so allows the control group
to be completely free from ETS effects. The model here is at the firm level and can be
formulated as follows:
Pjit = α + β2 ET Sit + γXijt + θZjt + λj + δt + ηjt + εjit (2)
12

where Pjit denotes the financial performance (measured by the ROA) of firm j that
enters country i during year t; Zjt represents a set of firm-level control variables; and
Xijt includes host country characteristics, and acquirers’ home country characteristics.
Other typical fixed effects and country-time trend controls are included. In both cases,
we expect coefficient β2 to be negative.
The test of a risk channel is extended from the aggregate DID model, and we use
mediation analysis. We use the ICRG dataset, which is constructed based on 22 variables,
classified into three subcategories, namely economic risks, political risks and financial
risks. Its coverage period is 1984-2019, and its data include 146 countries, making it a
good candidate for our analysis.
We use a two-step approach to test for the existence of a risk channel (Zhao et al.,
2010). The approach is used by Zhou et al. (2022) to explore the mediating role of green
credit creation in the relation between financial innovation and green growth. Taking the
test for relocation effects as an example, the model can be formulated as follows:
Mit = α + β3 ET Sit + γXit + λi + δt + ηit + εit (3)
Yit = α + β4 ET Sit + θMit + γXit + λi + δt + ηit + εit (4)
where β4 denotes the direct impact of an ETS on cross-border M&A scales. Mit is
defined as the mediator that potentially provides a channel linking ETS with Yit , the scale
of cross-border M&As. The other variables are defined in the same way as in Equation
1; we are interested in both β3 and θ. If M is indeed a mediator, then we would expect
significant β3 and θ. The mediation effect (indirect) is β3 × θ, whereas the total effect is
(β4 + β3 × θ). If we use the ICRG country risk as the mediator, the significant results
indicate that ETS implementation can reduce cross-border M&As by increasing the level
of risk in the host markets. Similar logic can be extended to test for other mediators’ roles
in both relocation effects and performance effects. The validity of the mediation effect
can also be tested using bootstrap methods.
13

4 Empirical Results
4.1 Relocation Effect of ETS Implementation
According to the discussions above and H1, we know that ETS implementation in the
host country may change MNEs’ investment decisions. They may need to relocate their
investments to countries without an ETS, which will decrease international capital inflows
to the host country. In other words, other things being equal, we expect a negative impact
of ETS implementation on the scales of cross-border M&As in the host country.
Taking the countries with an ETS as the treatment group and the countries without
an ETS as the control group, we can test the hypothesis H1 empirically. The results
are reported in Table 2, where we present six models, subject to the specifications of the
control variables. Given that this effect is at the national level, we first aggregate the
cross-border M&A deals in a country and take the natural logarithm (add 1 to avoid the
effects of 0 deals). It will be used as the dependent variable. The first column shows
unconditional effects, with no additional control variables but only country and year fixed
effects. The coefficient is -0.261 and statistically significant at the 1% level, indicating a
strong negative impact of ETS implementation on capital inflows. It also shows relatively
higher cross-border M&A deals in countries without an ETS, implying the existence of
a relocation effect. The coefficient (-0.261) indicates a 26.1% decrease in the number of
deals due to ETS implementation, which is also significant economically and should be
taken seriously by decision makers.
Of course, we need to ensure that the effect is reliable by controlling for other country-
specific variables and to include other model specification cases. Columns 2-6 show those
specifications, the negative effect or the relocation effect remains valid, and the number
is higher in most cases. Focusing on Column 6, where all controls are included, the
coefficient for the ETS is -0.349 and significant at the 1% level, which is even more serious
14

as the ETS policy can cut by one-third the cross-border M&As in the host country. Note
that the number does not necessarily reflect the real cases, as we need to consider the
upward trend of cross-border M&As during the entire sample period; thus we have also
controlled for country-year trend effects in the model.
The results for all control variables are essentially consistent with our intuition. Better
country-level governance can improve the attractiveness of international capital inflows
(e.g., Weitzel and Berns, 2006; Lim et al., 2016). Market size can also attract cross-border
M&As (see, e.g., Xie et al., 2017). Erel et al. (2012) show that bilateral trade increases
the likelihood of cross-boder M&As, although the impact of trade openness is reported
as controversial in the existing literature (Carril-Caccia and Pavlova, 2020). Our results
obtained from using trade openness confirm this positive relation, but the significant
effect is subject to model specifications (in Models 4 and 6, where the country-year trend
is included). Here, the role of resource endowments is unclear and the inclusion of a
vulnerability index does not change the results.
4.2 Is Acquirers’ Performance Affected by ETS?
The next step of our empirical analysis is to test the firm-level performance due to ETS
implementation or to test the existence of a cost channel. Following the argument made
in H2a, we expect a negative impact of ETS implementation on financial performance
(measured by the ROA). That implementation effect shall be applicable only to firms
that already entered the host country before the ETS implementation (treatment group),
whereas those firms that never entered that country shall have no such effect (control
group). Table 3 presents the empirical results.
Table 3 also shows five model results, subject to model specifications. Column (1)
lists the unconditional results, with only a few fixed effects included, whereas Columns
2-5 control a series of variables. The coefficients for the DID term (ETS) are generally
15

consistent, pointing to a range of -0.383 to -0.448 negative effects of the ETS implemen-
tation on the firms’ performance. Given the 1.53% mean of the ROA in our sample firms,
the approximately 0.4% average of the negative effect on performance is also economi-
cally significant. In other words, those firms that had entered a country prior to the ETS
implementation would be subject to a 0.4% lower performance due to the ETS.
The performance measure is at the firm level and applies to the acquirers, thus we
need to control for both firm-level and country-specific characteristics. For firms-level
controls, large firms show a relatively better performance on average, firms with longer
histories perform better, leverage has a negative relation to performance, whereas cash
flows have a positive relation. These findings are generally consistent with our knowledge
in the existing literature. Before interpreting these relationship, we have to realize that
the results on the control variables here have no direct link with cross-border M&As, but
the linkage applies to firms involved in M&As over the entire sample period. Opler and
Titman (1994) show that financial leverage indicates a higher cost of financial distress
and thus has a negative link with financial performance. A similar logic applies to cash
flows, where Fresard (2010) indicates that firms can gain from large cash reserves, which
lead to better future performance. Collins et al. (2009) suggest that firms’ experience
matters in cross-border M&As. Large firms and firms with longer histories tend to have
more experience, which explains the positive relation to financial performance.
When firm-level characteristics are included, most of the national level control variables
are insignificant, but two country-specific relation need extra attention. The host coun-
try’s income has a negative and significant relation to performance, whereas its growth
is positively linked with performance. These results can be partly explained by a large
volume of existing literature (for a review, see, e.g., Shimizu et al., 2004). Cross-border
M&A is considered a way of entering a foreign market, which tends to be affected by the
market growth in the host country. High-income countries tend to have a low growth rate,
which explains the contradicting sign between host-country income and growth. Another
significant and negative relation is observed between the acquirers’ home country gover-
16

nance, and their performance, but this negative result is not found in the host country’s
governance. Countries with better national governance often have developed markets
characterized by lower risks and uncertainties; thus. firms tend to have lower returns on
investment. This finding be reported by Chan et al. (2008), who show that institutional
development tends to have a negative relation to foreign affiliate firms’ performance.
4.3 Risk Channel
According to the discussion above, ETS implementation can also lead to higher risks in
the host country, which then lowers the scale of cross-border M&As. In other words, a risk
channel links ETS implementation with the total number of deals in the host country. We
test this channel using a mediation analysis (Zhao et al., 2010). The results are reported
in Table 4.
Using country-level ICRG risk measures and three sub-categories, we examine the
presence of mediation effects or a risk channel. The sample size here is smaller than
in the main regression when matched with the ICRG data, though Column 1 suggests
that the coefficient is similar to the one presented in Table 2. As the table shows, ETS
implementation has significant impacts on all risk measures (Columns 2-5). Here, the
negative number indicates a higher level of risks due to ETS implementation, which is
consistent with earlier discussions. Introducing the carbon-pricing initiative, especially
the ETS, can introduce extra risks in almost all aspects of the sub-categories, though not
all three types of risks are mediators.
The second stage regression (columns 5-9) shows only marginal significance (at the
10% level) in terms of economic risks. Fritz and MacKinnon (2007) suggest that stepwise
tests on the mediation effect have low power when the effect is not strong or when smaller
samples are used. To solve this problem, researchers can conduct the Sobel test (Sobel,
1987), or follow Preacher and Hayes (2008), who suggest to use the bootstrap approach
17

to test for the existence of mediation effects. Based on 500 random draws, we can show
significant indirect effects for total risks, economic risks and political risks. Their contri-
butions to the total effects are 9.753%, 8.841% and 4.56%, respectively. Economic risks
obviously constitute the main concern for the MNEs when making decisions to enter or
avoid a market. The non-significant financial risks may be a bit counterintuitive, though
we have to realize that the construction of financial risks in the ICRG is mainly based on
international finance, rather than that in the host country’s local market. The other two
risk categories have more relevant information about the host country’s internal financial
markets, for example, investment profiles in the political risk category and inflation in the
economic risk category.
4.4 Tests on the DID Models
To confirm the validity of our DID regressions, in Figure 3 and 4, we report the results of
parallel trend analysis of the relocation effect and the cost channel (performance effect),
respectively. The function form for the risk channel is essentially the same as that used
in the test for the relocation effect.
The figures show that significant negative effects apply only after the ETS implemen-
tation (at time t) in both cases. With the exception of one significant positive result
at time t − 3 found for relocation effects, all other estimations prior to the ETS imple-
mentation are non-significant. In other words, these results show the validity of the DID
specifications.
Following the study of Li et al. (2016), we also conduct a placebo test by randomly
drawing treatment groups from the sample and performing the DID regressions 1000
times. To be specific, there are seven years with ETS implementation (see appendix A
18

for more information). We randomly assign countries to the treatment group in each of
the seven years with ETS implementation. The DID results for these simulated random
draws should exhibit no significant effects in both relocation and performance analyses.
Figure 5 summarizes the distribution of the estimated coefficients, where the dashed
lines correspond to the coefficients estimated in our regressions. Panel (a) is for testing
relocation effects, and Panel (b) is for testing performance effects. Clearly, zeros are the
expected coefficients for both cases. The estimated DID coefficients from our regression are
statistically different from zero in both cases. These results suggest that the negative and
significant effects obtained from our DID analysis are not driven by unobserved factors.
5 Further Analysis
Beyond the main hypotheses, we also need to investigate more detailed issues behind the
general scale and performance impacts, which allows us to expand our knowledge obtained
from the existing literature. In particular, we examine sectoral effects, post-acquisition
performance, other carbon-pricing initiatives, and results focusing on the EU ETS only.
5.1 Sectoral Effects
The effects of ETS implementation should vary across industries (Lund, 2007). By defini-
tion, an ETS brings extra cost for high-emission industries (Cludius et al., 2020), whereas
low-emission or green industries should benefit or at least be free from this additional cost.
For example, Lin and Jia (2020) demonstrate that an ETS can potentially support the
growth of renewable energy sector. Of course, the sectors covered by an ETS or mostly
affected by it may also pass their costs to other industries. The empirical estimations
by Cludius et al. (2020) demonstrate that the costs raised by the EU ETS in the ce-
ment, iron and steel, and refinery sectors are associated with significant cost pass-through
19

effects. Following these arguments, ETS implementation may generate different levels
of effects across industries. We expect a stronger influence on cross-border M&As for
carbon-intensive industries. The impacts may also exist for other industries due to the
cost pass-through effects.
To test for the sectoral effects, we first allocate sample firms into sectors. Using the
US standard industrial classification (SIC), the whole sample is divided into ten sectors
(divisions): Agriculture, Forestry and Fishing (AF&F ); Mining (Mining); Construction
(Construction); Manufacturing (Manufacturing); Transportation, Communications, Elec-
tric, Gas and Sanitary services (TCEG&S ); Wholesale Trade (Wholesale); Retail Trade
(Retail ); Finance, Insurance and Real Estate (FI&R); Services (Services), and Public
administration. Note that the last sector has a very small sample and is thus excluded
from our analysis. The sample distribution across the sectors is plotted in Figure 6.
Among all 9 effective sectors, Services has the largest share, taking 34.57% of all
samples, followed by Manufacturing, with a share of 27.47%. These two sectors account
for more than 60% of all samples. For carbon intensity across the sectors, we use the data
provided by Ricardo Energy and Environment, UK Office for National Statistics5 as the
reference. The sectors with carbon dioxide emission intensity above average are considered
carbon-intensive sector, and those with below average intensity are low-carbon sector.
Although the industry classification differs, we can confidently state that four sectors
are carbon intensive, namely AF&F, Mining, Manufacturing and TCEG&S, whereas all
others are low-carbon sectors. Taking 2019 as an example, the UK total intensity is 0.17
thousand tonnes CO2 equivalent per million pounds, where the most carbon-intensive
sector is Electricity, gas, steam and air conditioning supply (3.08); followed by Transport
and storage (0.99); Mining and quarrying (0.93); Agriculture, forestry and fishing (0.68);
and Manufacturing (0.43).
5
https://www.ons.gov.uk/economy/environmentalaccounts/
20

We take two ways to measure sectoral differences. First, we run DID regressions for all
nine main sectors separately for both relocation and performance effects. The results are
presented in Figures 7 and 8 for relocation effects and performance effects, respectively.
As shown in Figure 7, all coefficients estimated in the sectoral DID model are negative,
though only three sectors have statistically significant results, namely Manufacturing,
Services and TCEG&S. This confirms the fact that not only carbon-intensive sectors bear
the cost of an ETS, there is also an indirect channel that leads to negative impacts on low-
carbon sector (e.g., Services). We have to take these results with caution as the samples
for certain sectors are quite small, affecting the power of the statistical tests. Nonetheless,
the pattern is interesting. There are clear sectoral differences, and carbon-intensive sectors
tend to suffer greater impacts.
The sectoral impacts on performance shows a less clear pattern. Although 7 out of
9 sectors have negative coefficients, only 2 of them are significant. The Mining sector
receiveds the largest negative shock, followed by the Wholesale sector. To avoid small-
sample problems in the individual sectoral analysis, we use the second approach to exam-
ine the problem, that is, to split the samples into carbon-intensive and low-carbon sectors.
The regression results are reported in Table 5.
Table 5 presents the regression results for sectoral impacts of ETS implementation.
Columns 1-4 present the results for relocation effects and use the number of M&A deals
in the carbon-intensive sector (High) and the low-carbon sector (Low), respectively, as
the dependent variable, and run DID regressions similar to the baseline regressions. The
effects of ETS on number of deals are all negative for both sectors. The coefficients
21

for the carbon-intensive sector are generally higher than those for the low-carbon sector.
The difference is statistically significant, with p-values equal to 0.04 and 0.00 in two
specifications. These are consistent with individual sample regression results in that all
sectors have negative coefficients. The leading sector in each category, Manufacturing in
the carbon-intensive sector and Services in the low-carbon sector, both have significant
negative results (see Figure 7), whereas the coefficient for Manufacturing is higher than
that for Services.
Columns 5-8 are for the cost channels, thus with ROA as the dependent variable,
but the samples are separated according to sector (High or Low). The difference in
performance effects between the two sectors is more obvious than that obtained from
the test of relocation effects. The coefficients for the carbon-intensive sector are close to
the main results and significant at the 1% level, whereas the numbers for the low-carbon
sector are clearly smaller and only marginally significant, as shown in column 6. The
p-values based on bootstrap tests indicate that the impacts on carbon-intensive sector are
stronger than that on low-carbon sector, which also confirm their significant differences.
Following the study of Bartram et al. (2022), we use the last two columns to pool the
samples and include triple interaction terms. Here, Carbon is a dummy variable equal to 1
if the firm belongs to the carbon-intensive sector, otherwise, it is equal to 0. T reat refers to
the treatment group dummy, defined similarly to that used in the main regressions. ET S×
Carbon is the interaction term, and the coefficients for both specifications in Columns 9
and 10 are significant at the 1% level, indicating that the negative effects are essentially
driven by carbon-intensive sector, which confirms the information presented in Columns
5-8. The carbon-intensive sector demonstrates generally lower financial performance, as
indicated by the negative and significant coefficients for Carbon (-0.857).
Overall, despite some variations, there is clear evidence that sectoral differences exist.
The carbon-intensive sector, which tends to bear higher costs with an ETS, generally
suffers stronger negative effects on performance, and leading to lower scales or more likely
subjected to relocation effects. Although we have not explicitly tested the direct and
22

indirect channels, the negative impacts of an ETS on both sectors suggest that the extra
costs are mostly applied to the carbon-intensive sector, and also pass through to other
sectors, leading to indirect cost spillovers.
5.2 Post-Acquisition Performance with ETS
The cost channel above tests the hypothesis that ETS implementation reduces acquiring
firms’ financial performance, whereas the firms must have already entered the host country
before the ETS was implemented. The significant negative impact confirms that firms
have to bear extra costs with an ETS, thus decreasing their financial performance. We
could interpret that effect as the long-term influence of climate policies, but it is also
interesting to see how the short-term differences in the performance of firms engaging in
cross-border M&As in countries with an ETS and those without an ETS, further reinforce
the cost channel. In general, we expect poorer post-acquisition operating performance of
firms entering a market with an ETS.
Following recent literature on understanding post-acquisition performance (e.g. Gol-
ubov and Xiong, 2020; Dong et al., 2021), we setup the model below:
∆ROAjt = α + βET Sit + γXijt + θZjt + λj + δt + εjt (5)
We follow Golubov and Xiong (2020) by using ∆ROA(−1, 1) = ROA(1) − ROA(−1)

and ∆ROA(−1, 2) = ROA(2) − ROA(−1) to represent post-acquisition performance,
that is, use one year or two years after M&A performance (ROA) and subtract ROA one
year before M&A. ET Sit is a dummy variable equal to 1 if the host country has an ETS;
otherwise, it is equal to 0. X and Z are sets of country-specific and firm-specific control
variables, respectively, similar to those used in previous regressions. We also control for
firm and year fixed effects in all regressions.
The results are reported in Table 6. Columns 1-4 use ∆ROA(−1, 1) as the dependent
variable, and Columns 5-8 take ∆ROA(−1, 2) as the dependent variable. The difference
23

between these models is whether we control for host-country characteristics or acquiring-
country characteristics, or both. However, these have no significant impacts on the results.
We are interested in the ETS coefficients, which are generally negative as expected.
In other words, an acquiring firm’s post-acquisition financial performance is lower if the
deal is made in a country with an ETS. The effect takes a bit longer to appear. Over a
two-year period, there will be, at least on average, -0.63% lower ROA for firms entering
a market with an ETS. This result can help us understand the relocation effects found
above. Firms have to bear higher costs when entering a country with an ETS; thus, they
tend to invest in other countries without an ETS.
Other control variables’ relation to post-acquisition financial performance are similar
to the findings of Golubov and Xiong (2020). For example, size is negatively associated
with post-acquisition performance. Age is not significant in most cases. Leverage has a
positive impact on post-acquisition performance (Dong et al., 2021), and cash flow has
an insignificant impact. We also use the propensity score matching approach to check the
robustness of these results, and they are generally consistent (see Appendix B for more
information).
5.3 Including All Carbon-Pricing Initiatives
An ETS is not the only carbon-pricing initiative. Carbon tax is another alternative
and popular approach to make carbon emissions costly, which also contributes to the
achievement of climate targets (Chen et al., 2020). According to the World Bank6 , as
of the end of 2021, there were 65 carbon-pricing initiatives in total. Among them, 45
initiatives are at the national level, whereas 34 are at the subnational level, indicating the
existence of a hybrid mode. There is a long historical debate on which system is a more
effective instrument. While Spulber (1985) suggests that the cap-and-trade system and
6
https://carbonpricingdashboard.worldbank.org/
24

carbon tax are equivalent in terms of free entry and exit of small firms, more studies point
out the limitations of carbon tax alone in the long term (e.g., Carlton and Loury, 1980).
Shinkuma and Sugeta (2016) also favour the ETS over the emission tax scheme. While in
this paper, we do not aim to join this debate, we do consider whether the above-mentioned
results for an ETS can be applied to all carbon indicatives.
The results are presented in Table 7, which contains a summary of three set of testing
results, namely relocation effects, performance effects and post-acquisition performance
effects. We consider the implementation of any carbon-pricing initiative as a natural
experiment to set-up the DID model (following the same rules as those of the main
regressions) and then separately analyze the roles of the ETS and carbon tax. In all
regressions for relocation effects, we include host country control variables, whereas in
all regressions at the firm level, we add extra acquiring country control variables and
firm-level control variables.
First, the results presented in Columns 1, 4 and 7 show that the relocation effect
and the performance effect exist for all pricing initiatives, but the post-acquisition effect
is significant only marginally. The coefficients for all cases have lower value than those
previously found for equivalent ETS effects (see Columns 2, 5 and 8). Not surprisingly,
the reason is that we cannot identify similar effects when including carbon tax alone.
None of the coefficients is significant, as shown in Columns 3, 6, and 9.
We should be cautious in how to interpret the results. Finding insignificant effects
from carbon tax does not indicate its superiority over the ETS, as the results only show
effects on cross-border M&As, not on carbon emissions. However, we can present these
results to policymakers, indicating that carbon tax does not trigger additional negative
economic effects, other things being equal. One of the possible explanations behind this
involves the risk channel. Although the ETS can bring stronger policy uncertainties and
trigger extra market risks, leading firms to relocate their investments, carbon tax is more
25

predictable and does not necessarily have clear linkages with similar uncertainties.
5.4 EU ETS
Recognizing that the EU ETS is the first and the largest ETS in the world, and also
has the longest history and perhaps the most established system to date, we can use EU
members for further robustness checks. Note that both China and the US, two other major
countries (as shown in Figure 2), only have pilot or regional ETSs during the effective
sample period; thus, it makes sense to further investigate whether similar findings are
valid for the EU ETS only. In all samples for testing relocation effects and performance
effects, the shares of EU as host countries for cross-border M&As are 20.55% and 27.64%,
respectively. If we focus on the samples with an ETS, then the share of sample deals from
the EU is 58.4%. This gives us a strong incentive to examine the EU samples only.
The results for both relocation effects and performance effects are reported in Table 8.
Note that all other countries with an ETS are excluded from this analysis. The treatment
group comprises only the member countries with the EU ETS and the firms entering this
market. The findings are generally consistent with our main results, although there are
larger impacts for both relocation effects and performance effects.
To illustrate the relocation effects of the EU ETS implementation, we use a more

straightforward visual illustration in Figure 9, which shows the sectoral distribution of
cross-border M&As for the EU region before and after the EU ETS implementation in
2005.
The order of the legends is the ranking of sectors according to the number of deals.
Before 2005, the Manufacturing sector held the leading position in the EU region, but
Services took over after 2005 to be the leading sector entering the EU region. Similarly,
26

the TCEG&S sector was the third largest sector before 2005, but its position was taken
by FI&R, a low-carbon sector, after the EU ETS implementation. In general, a clear shift
of the sectoral distribution in the EU region to less carbon-intensive industries can be
observed, which also confirms the relocation effects.
6 Conclusions
We use a large sample of cross-border M&As over the 2002-2019 period to investigate the
economic impacts of climate policies. Specifically, we take the DID approach to evaluate
how and to what extent ETS implementation can affect international capital inflows in the
form of cross-border M&As in the host country. We also study the financial performance
of acquiring firms, following the ETS implementation in the host country as a cost channel
and the impacts on a set of country-specific risks as a risk channel.
Our empirical analysis shows clear evidence that both the scale and the performance
of cross-border M&As negatively respond to ETS implementation. In other words, MNEs
react to ETS implementation by reducing investments in the country with an ETS, indi-
cating the existence of a relocation effect and a cost channel. These finding are consistent
with those of the recent study (Bartram et al., 2022) on the real effects of the California
ETS, showing firms responding to climate policies and relocating their production. As
a consequence, this type of regulatory arbitrage weakens policy effectiveness and causes
carbon leakage. We show that such effect exists at the global level. ETS implementation
increases costs to the firms in the host country and thus decreases the financial perfor-
mance of acquiring firms. It also raise a set of country level-risks, which acts as a channel
to the relocation effect.
Further analysis shows clear sectoral differences. Specifically, carbon-intensive sector
tend to have stronger relocation effects, which partially contribute to the existence of
a cost channel (stronger negative impacts on performance). Our analysis on the post-
acquisition performance and ETS shows that cross-border M&As in countries with an
27

ETS have lower financial performance, which further reinforces previous findings on the
cost channel.
In general, our research enriches the recently thriving literature on climate finance. We
demonstrate taat climate policies can have significant and potentially negative impacts on
firms’ investment decision and performance. While making emissions costly can help in
solving the climate problem, governments need to consider the potential negative economic
impacts and take proper measures to alleviate costs for key sectors and control the spread
of risks from the carbon market to the whole economy. Of course, further analysis is needed
to delves into the direction of capital flows due to ETS implementation (carbon leakage).
We also provide evidence that may offer support to the EU’s forthcoming CBAM, which
is designed to avoid carbon leakage. As suggested by Nordaus (2015), a small panelty
could lead to a larger and more stable coalition against climate change. Nonetheless, the
impacts of this mechanism could be much more complicated and are thus worth further
investigation.
28

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35

Figure 1: Sample distribution across countries with and without an ETS. This figure
shows the distribution of cross-border M&As during the 2002-2019 period. The colour
green refers to countries with an ETS in that period, whereas yellow means no ETS was
implemented before 2019. The size of the dots corresponds to the number of deals.
36

Figure 2: Cross-border M&A deals before and after ETS implementation. This figure
plots the annual cross-border deals in China, the US, the EU and other countries with
an ETS during our sample period. Here, t = 0 refers to the year when the ETS was
implemented.
37

.5
0
−.5
t−4 t−3 t−2 t−1 t t+1 t+2 t+3 t+4
Figure 3: Parallel trend test for relocation effects.

1
.5
0
−.5
−1
−1.5
t−4 t−3 t−2 t−1 t t+1 t+2 t+3 t+4
Figure 4: Parallel trend test for performance effects.
38

1.5
4
3
1
Density
Density
2
.5
0 0
−.5 −.4 −.3 −.2 −.1 0 .1 .2 .3 .4 .5 −1 −.9−.8−.7−.6−.5−.4−.3−.2−.1 0 .1 .2 .3 .4 .5 .6 .7 .8 .9 1
Treatment Effect Treatment Effect
(a) Relocation effects (b) Performance effects
Figure 5: Placebo tests for the DID regressions. Note: These two figures show the
distribution of the estimated coefficients based on 1000 random draws by assigning ETS
implementation to countries. The vertical dashed lines in Panel (a) and Panel (b) refer to
the estimation results on the ETS in the last column of both Tables 2 and 3, respectively.
Figure 6: Sectoral distribution in the full sample. This figure shows the sample distribu-
tion across sectors, which are defined according to the US SIC industry classification. The
whole sample is divided into ten sectors (divisions): Agriculture, Forestry and Fishing
(AF&F ); Mining (Mining); Construction (Construction); Manufacturing (Manufactur-
ing); Transportation, Communications, Electric, Gas and Sanitary services (TCEG&S );
Wholesale Trade (Wholesale); Retail Trade (Retail ); Finance, Insurance and Real Estate
(FI&R); and Services (Services). Note that the Public Administration sector has a very
small sample and was thus dropped.
39

Coef.
Manufacturing 95% CI
Construction
Mining
AF&F
Services
n
TCEG&S
Retail
FI&R
Wholesale
−.6 −.5 −.4 −.3 −.2 −.1 0 .1 .2 .3 .4
Figure 7: Sectoral relocation effects of ETS implementation.
40

Coef.
Mining 95% CI
Wholesale
AF&F
FI&R
Manufacturing
n
Retail
Services
Construction
TCEG&S
−5 −4 −3 −2 −1 0 1 2 3 4
Figure 8: Sectoral performance effects of ETS implementation.
(a) Before 2005 (b) After 2005
Figure 9: Sectoral distribution of cross-border M&As in the EU before and after 2005.
This figure uses samples limited to the host countries in the EU region and reports the
sample distribution across sectors before and after the implementation of the EU ETS
(2005). The order of the legends is the ranking of sectors according to the number of
deals.
41

Table 1: Descriptive statistics
This table reports descriptive statistics for host-country characteristics (panel A) and
firm-level variables (Panel B). In Panel A, Deals refer to the natural logarithm of cross-
border M&A deals (+1) for a country; WGI means the World Governance Index; Income
is also the natural logarithm of per capita GDP; Growth denotes the GDP growth rate;
Resource is the measure of resource endowments (the share of ore and metal exports in
merchandise exports (%); Trade measures openness and is the share of exports and imports
over GDP; and the Vulnerability index measures physical risk exposure to climate change.
The country-specific risk measure includes the main index (T-risk). Three subcategories
are also considered: E-risk refers to economic risks. F-risk represents financial risks.
P-risk denotes political risks. The higher the index, the lower the level of risk in each
category. In Panel B, ROA refers to return on assets (%); Size is the natural logarithm
of market capitalization; Age is the natural logarithm of the firm age; Leverage denotes
the debt/equity ratio (%); and cash refers to the ratio of cash flow to total assets (%).
Panel A Country level statistics

Variables country-year obs. Mean StD. Min Median Max
Deals 2453 2.64 1.79 0.00 2.20 6.98
WGI 2453 0.10 0.87 -1.50 -0.12 1.83
Income 2453 8.63 1.49 5.59 8.57 11.37
Growth(%) 2453 3.72 3.54 -7.73 3.80 13.94
Resource(%) 2453 8.85 14.38 0.00 2.88 67.42
Trade(%) 2453 86.64 48.17 25.79 77.22 319.70
Vulnerability 2453 0.42 0.09 0.25 0.41 0.61
T-risk 1992 71.15 8.96 35.00 70.97 92.38
E-risk 1992 36.23 5.23 9.750 36.15 50.00
F-risk 1992 37.93 5.03 17.21 37.96 50.00
P-risk 1992 68.13 12.13 33.21 67.58 94.67
Panel B Firm level statistics
Variables firm-year obs. Mean StD. Min Median Max
ROA(%) 55512 1.53 16.05 -71.10 4.50 33.88
Size 55512 19.62 2.49 14.12 19.70 25.05
Age 55512 3.21 0.89 0.69 3.18 5.08
Leverage(%) 55512 49.70 22.44 1.77 51.93 95.29
Cash(%) 55512 4.52 14.50 -65.32 6.99 34.16
42

Table 2: DID regression results for testing relocation effects
This table reports DID regression results to test for relocation effects. The dependent
variable in all regressions is the log of the total number of deals (+1) in each country
from 2002 to 2019. The indicator variable ET S is equal to 1 in a country with ETS;
otherwise, it is equal to 0.. Columns 1-2 present unconditional results with country and
year fixed effects; Column 2 includes a country-year trend. Columns 3-4 include a set of
host country-specific control variables with and without the country-year trend. Columns
5-6 add the Vulnerability index in the regression to control for the country-specific climate
vulnerability, also with and without the country-year trend. Robust standard errors
clustered at the country level are in parentheses. *, ** and *** denote 10%, 5% and 1%
levels of significance, respectively.
Deals (1) (2) (3) (4) (5) (6)

ETS -0.261*** -0.354*** -0.258*** -0.348*** -0.264*** -0.349***
(0.075) (0.078) (0.071) (0.076) (0.072) (0.076)
WGI 0.325** 0.468*** 0.322** 0.465***
(0.135) (0.166) (0.136) (0.168)
Income 0.076 0.282** 0.089 0.286**
(0.113) (0.127) (0.117) (0.127)
Growth 0.013** 0.005 0.013** 0.005
(0.005) (0.005) (0.005) (0.005)
Resource -0.001 -0.002 -0.001 -0.002
(0.002) (0.003) (0.002) (0.003)
Trade 0.002 0.005*** 0.002 0.005***
(0.002) (0.002) (0.002) (0.002)
Vulnerability 1.181 0.714
(2.319) (2.524)
Constant 2.688*** 2.707*** 1.789* -0.229 1.180 -0.563
(0.015) (0.016) (1.035) (1.160) (1.608) (1.628)
Country fixed effect Yes Yes Yes Yes Yes Yes
Year fixed effect Yes Yes Yes Yes Yes Yes
Country-Year trend No Yes No Yes No Yes
Observations 2,453 2,453 2,453 2,453 2,453 2,453
R-squared 0.934 0.954 0.935 0.955 0.935 0.955
43

Table 3: DID regression results for ROA (cost channel)
This table reports DID regression results to test for the ETS effect on firm-level financial
performance. The dependent variable in all regressions is the acquiring firms’ return on
assets (ROA) from 2002 to 2019. The indicator variable ET S is equal to 1 in a country
with an ETS; otherwise, it is equal to 0. For all regressions, we control for country and
year fixed effects together with the country-year trend. Column 1 presents unconditional
results. Column 2 includes a set of host country-specific control variables. Column 4
controls for acquirers’ home country control variables. Column 5 includes both host and
acquiring country controls. Country specific control variables include “Host_”, referring
to target firms’ host country variables, and “Acq_”, referring to acquiring firms’ home-
country variables. Robust standard errors clustered at the country level are in parentheses.
*, ** and *** denote 10%, 5% and 1% levels of significance, respectively.
ROA (1) (2) (3) (4) (5)
ETS -0.448** -0.383*** -0.400*** -0.390*** -0.408***

(0.225) (0.102) (0.111) (0.100) (0.106)
Size 1.473*** 1.474*** 1.496*** 1.497***
(0.131) (0.131) (0.132) (0.132)
Age 0.665** 0.677*** 0.665*** 0.678***
(0.258) (0.257) (0.252) (0.252)
Leverage -0.052*** -0.052*** -0.052*** -0.052***
(0.004) (0.004) (0.004) (0.004)
Cash 0.788*** 0.788*** 0.788*** 0.788***
(0.014) (0.014) (0.014) (0.014)
Host_WGI 0.943 0.954
(0.668) (0.674)
Host_Income -0.964** -0.910**
(0.376) (0.382)
Host_Growth 0.052* 0.051*
(0.030) (0.029)
Host_Resource -0.028 -0.033
(0.027) (0.026)
Host_Trade -0.012* -0.011
(0.007) (0.007)
Host_Vulnerability -0.256 -0.936
(5.851) (5.874)
Acq_WGI -1.477*** -1.440***
(0.514) (0.523)
Acq_Income -0.944* -0.934*
(0.493) (0.484)
Acq_Growth -0.014 -0.014
(0.026) (0.026)
Acq_Resource -0.051 -0.054
(0.040) (0.039)
Acq_Trade -0.009* -0.009*
(0.005) (0.005)
Acq_Vulnerability -2.546 -2.735
(4.456) (4.570)
Constant 1.859*** -30.276*** -20.507*** -17.388*** -7.994
(0.103) (2.644) (5.023) (6.394) (7.568)
Firm fixed effect Yes Yes Yes Yes Yes
Year fixed effect Yes Yes Yes Yes Yes
Country-Year trend Yes Yes Yes Yes Yes
Observations 54,953 54,953 54,953 54,953 54,953
R-squared 0.593 0.811 0.811 0.811 0.811
44

Table 4: Is there a risk channel?
This table tests the existence of a risk channel from ETS implementation to the aggregate
scale of cross-border M&As. The country-specific risk measure is from the ICRG database;
in addition to the main index (T-risk), three subcategories are also considered: E-risk
refers to economic risks. F-risk denotes financial risks. P-risk represents political risks.
The higher the index, the lower the level of risk in each category. ETS is the DID term
used in previous regressions. Column 1 reproduces the relocation regression using the
effective sample matched with country risks. Columns 2-5 show the first-step regressions in
Equation 3, and Columns 6-9 present the second-step regressions in Equation 4. Bootstrap
standard errors for indirect effects are calculated based on 500 random draws. Robust
standard errors clustered at the country level are in parentheses. *, ** and *** denote
10%, 5% and 1% levels of significance, respectively.
(1) (2) (3) (4) (5) (6) (7) (8) (9)

VARIABLES Deals T-risk E-risk F-risk P-risk Deals Deals Deals Deals
ETS -0.374*** -3.631*** -2.756*** -2.805*** -1.701*** -0.336*** -0.341*** -0.370*** -0.356***
(0.079) (0.645) (0.549) (0.691) (0.500) (0.079) (0.079) (0.080) (0.079)
T-risk 0.010
(0.006)
E-risk 0.012*
(0.007)
F-risk 0.001
(0.006)
P-risk 0.010
(0.007)
Indirect effect -0.037* -0.033** -0.004 -0.018**
(0.021) (0.015) (0.018) (0.008)
Indirect effect(%) 9.753 8.841 0.752 4.560
Constant 0.458 -1.910 -16.433 -12.738 25.370** 0.477 0.652 0.475 0.194
(1.951) (13.074) (11.187) (12.947) (10.339) (1.925) (1.926) (1.966) (1.956)
Host country controls Yes Yes Yes Yes Yes Yes Yes Yes Yes
Country fixed effect Yes Yes Yes Yes Yes Yes Yes Yes Yes
Year fixed effect Yes Yes Yes Yes Yes Yes Yes Yes Yes
Country-Year trend Yes Yes Yes Yes Yes Yes Yes Yes Yes
Observations 1,992 1,992 1,992 1,992 1,992 1,992 1,992 1,992 1,992
R-squared 0.955 0.952 0.864 0.832 0.980 0.955 0.955 0.955 0.955
45

Table 5: Does ETS implementation have stronger impacts on carbon-intensive sector?
This table presents the regression results for testing sectoral effect that carbon-intensive
sector tends to bear higher costs and thus suffers from stronger impacts of ETS implemen-
tation. We separate the sectors into carbon-intensive sector and low-carbon sector accord-
ing to the UK National Statistics for carbon emission intensity by industry. Specifically,
carbon intensive industries include Agriculture, Forestry and Fishing (AF&F ); Mining
(Mining); Manufacturing (Manufacturing); and Transportation, Communications, Elec-
tric, Gas and Sanitary services (TCEG&S ). These industries have carbon-intensive levels
above the mean level. Columns 1-4 report results for relocation effects and use the num-
ber of deals in carbon-intensive sector (High) and low-carbon sector (Low), respectively,
as the dependent variable and run DID regressions similar to the baseline regressions.
Columns 5-8 show the performance effects with ROA as the dependent variable, but the
samples are separated according to sector (High and Low). Following the method of Bar-
tram et al. (2022), the last two columns pool samples and include triple interaction terms.
Carbon is a dummy variable equal to 1 if the firm belongs to the carbon-intensive sector.
T reat refers to the treatment group dummy. Host-country controls are included for relo-
cation effects, whereas the performance effect regressions also include acquiring country
and firm-level controls. The p-value, based on the bootstrap test of the hypothesis that
carbon-intensive sector bears stronger negative impacts is reported in square brackets.
Robust standard errors clustered at the country level are in parentheses. *, ** and ***
denote 10%, 5% and 1% levels of significance, respectively.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
High Low High Low High Low High Low ROA ROA
ETS×Carbon -0.506*** -0.512***
(0.161) (0.162)
ETS -0.262*** -0.206** -0.330*** -0.217*** -0.407*** -0.338* -0.437*** -0.110 -0.026 -0.145
(0.066) (0.083) (0.066) (0.077) (0.134) (0.178) (0.163) (0.228) (0.161) (0.209)
p-value: High>Low [0.04] [0.000]
Treat×Carbon 0.234 0.241

(0.236) (0.236)
Carbon -0.857*** -0.855***
(0.182) (0.183)
Constant 2.988* 0.191 1.683 -1.507 -11.398 -3.553 -34.034*** -28.935*** -11.897*** -9.826**
(1.735) (1.559) (1.760) (1.372) (11.288) (7.489) (6.313) (8.897) (3.754) (4.541)
Host country controls Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Acquring country controls No No No No Yes Yes Yes Yes Yes Yes
Firm level controls No No No No Yes Yes Yes Yes Yes Yes
Firm fixed effect No No No No Yes Yes Yes Yes No No
Country fixed effect No No Yes Yes No No No No Yes Yes
Year fixed effect Yes Yes Yes Yes Yes Yes No No No Yes
Country-Year trend Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Observations 2,024 1,966 2,024 1,966 29,721 22,970 29,721 22,970 53,234 53,234
R-squared 0.931 0.929 0.948 0.953 0.808 0.817 0.808 0.817 0.749 0.750
46

Table 6: Post-acquisition performance with an ETS
This table tests whether an ETS affects post-acquisition performance. The dependent
variables are ∆ROA(−1, 1) in Columns 1-4 and ∆ROA(−1, 2) in Columns 5-8, represent-
ing post-acquisition performance. They are calculated by subtracting ROA 1 or 2 years
after the deal by ROA 1 year before the deal (Golubov and Xiong, 2020; Dong et al.,
2021). ETS is a dummy variable equal to 1 if the firm enters a country with an ETS;
otherwise, it is equal to 0. We control for size, age of the firm, leverage and cash flows
at the firm level. Columns 1 and 5 include only firm-level control variables, Column 2
and 6 include firm-level controls and host country characteristics. Columns 3 and 7 in-
clude firm-level controls and acquiring country characteristics. Columns 4 and 8 include
firm-level controls and both host and acquiring country-specific control variables. Robust
(1) (2) (3) (4) (5) (6) (7) (8)

∆ROA(−1, 1) ∆ROA(−1, 2)
ETS -0.304* -0.155 -0.303* -0.156 -0.630*** -0.665** -0.638*** -0.703***
(0.182) (0.273) (0.181) (0.275) (0.211) (0.266) (0.211) (0.268)
Size -1.303*** -1.296*** -1.248*** -1.241*** -2.521*** -2.518*** -2.421*** -2.418***
(0.224) (0.223) (0.224) (0.223) (0.308) (0.308) (0.308) (0.308)
Age -0.733 -0.734 -0.781 -0.783 -0.503 -0.504 -0.543 -0.543
(0.713) (0.711) (0.742) (0.739) (0.683) (0.681) (0.698) (0.695)
Leverage 0.060*** 0.060*** 0.060*** 0.060*** 0.089*** 0.089*** 0.089*** 0.089***
(0.018) (0.018) (0.018) (0.018) (0.017) (0.017) (0.017) (0.017)
Cash 0.040 0.040 0.039 0.039 -0.117*** -0.116*** -0.119*** -0.118***
(0.036) (0.036) (0.036) (0.036) (0.039) (0.039) (0.039) (0.039)
Constant 25.039*** 24.764*** 49.902*** 49.303*** 49.185*** 45.617*** 89.144*** 84.942***
(4.745) (4.780) (12.506) (11.475) (6.535) (7.226) (13.392) (13.716)
Host country controls No Yes No Yes No Yes No Yes
Acquiring country controls No No Yes Yes No No Yes Yes
Firm fixed effect Yes Yes Yes Yes Yes Yes Yes Yes
Year fixed effect Yes Yes Yes Yes Yes Yes Yes Yes
Observations 15,470 15,470 15,470 15,470 13,980 13,980 13,980 13,980
R-squared 0.345 0.345 0.345 0.346 0.379 0.379 0.380 0.380
47

Table 7: Effects on cross-border M&As from all carbon-pricing initiatives
This table presents the results of testing the impacts of all carbon-pricing initiatives,
including the implementation of carbon tax. Columns 1-3 report the results of testing the
relocation effects of all carbon-pricing initiatives, the ETS and carbon tax, respectively.
Columns 4-6 show the results of testing the performance effects of all carbon-pricing
initiatives, the ETS and carbon tax, respectively. Columns 7-9 presents the results of
testing post-acquisition performance (∆ROA(−1, 2) as the dependent variable) associated
withall carbon-pricing initiatives, the ETS and carbon tax, respectively. All appropriate
control variables are included. Robust standard errors clustered at the country level are
in parentheses. *, ** and *** denote 10%, 5% and 1% levels of significance, respectively.
(1) (2) (3) (4) (5) (6) (7) (8) (9)

All pricing initiatives -0.192*** -0.358*** -0.468*
(0.071) (0.095) (0.253)
ETS -0.349*** -0.446*** -0.703***
(0.076) (0.108) (0.268)
Carbon tax 0.071 -0.039 -0.017
(0.085) (0.159) (0.249)
Host country controls Yes Yes Yes Yes Yes Yes Yes Yes Yes
Acquiring country controls Yes Yes Yes Yes Yes Yes
Firm level controls Yes Yes Yes Yes Yes Yes
Country fixed effect Yes Yes Yes Yes Yes Yes Yes Yes Yes
Year fixed effect Yes Yes Yes Yes Yes Yes Yes Yes Yes
Country-Year trend Yes Yes Yes Yes Yes Yes No No No
Observations 2,453 2,453 2,453 53,469 53,469 53,469 13,980 13,980 13,980
R-squared 0.954 0.955 0.954 0.811 0.811 0.811 0.380 0.380 0.380
48

Table 8: Effects on cross-border M&As for EU ETS only
This table presents the results of testing the impacts of ETS implementation in host
countries from the EU ETS only. Columns 1-4 report the results of testing the relocation
effects. The Vulnerability index is excluded from Columns 1 and 3, but included in
Columns 2 and 4. Columns 5-8 show the results of testing the performance effects. All
appropriate control variables are included. Note that the other countries with an ETS
are excluded from this analysis; thus, it has a smaller number of observations. Robust
(1) (2) (3) (4) (5) (6) (7) (8)

EUETS -0.407*** -0.413*** -0.438*** -0.438*** -0.881** -1.128*** -0.850** -1.099***
(0.088) (0.089) (0.089) (0.089) (0.340) (0.356) (0.338) (0.358)
Constant 1.882* 1.318 -0.118 -0.374 -26.596*** -16.363** -14.691*** -5.645
(1.093) (1.677) (1.220) (1.703) (2.898) (6.908) (4.947) (8.975)
Host country controls No Yes Yes Yes No Yes No Yes
Acquiring country controls No No No No No No Yes Yes
Firm level controls No No No No Yes Yes Yes Yes
Firm fixed effect No No No No Yes Yes Yes Yes
Country fixed effect Yes Yes Yes Yes No No No No
Country-Year trend No No Yes Yes Yes Yes Yes Yes
Observations 2,309 2,309 2,309 2,309 37,764 37,764 37,764 37,764
R-squared 0.925 0.925 0.948 0.948 0.821 0.821 0.821 0.821
49

Appendix A Additional information
This appendix presents additional information to support our main analysis. Table A1
lists the countries with all carbon-pricing initiatives, including the ETS and carbon tax
and the associated year of their implementation. The information in this table is obtained
from the World Bank7 . Launched in 2005, the EU ETS is the biggest of all ETSs, covering
28 member countries. At the national level outside the EU region, only four countries,
namely Switzerland, New Zealand, Korea and Kazakhstan launched an ETS during our
sample period. Four other countries, namely Canada, Japan, China and the US, had a
subnational ETS during our sample period. The list shows that 23 nations introduced
carbon tax, and there are overlaps; thus, some countries in the sample have a hybrid
mode.
Table A2 provides information on all variables used in this study, including their
abbreviations and definitions. Cross-border M&A deals are collected from the BVD-
Zephyr Global M&A Transaction Analysis Database. All other firm-level information
is obtained from the BVD-Osiris Global Public Company Analysis Database. Country-
specific information is collected from the World Bank, whereas the Vulnerability index is
downloaded from the Notre Dame Global Adaptation Initiative(ND-GAIN) to represent
physical climate risk exposures of each country. The reason why we include this extra
control variable is that an ETS is one type of climate policy. If firms pay attention to
climate policy, then they may also take climate exposure into consideration when involved
in international resource allocation. To test the existence of a risk channel, we project
that ETS implementation increases uncertainties in a market, raising financial risks in
particular, and then affects the cost of financing, which in turn results in lower financial
performance. Here, we use three risk measures, namely economic risks, financial risks and
political risks, constructed by the International Country Risk Guide (ICRG). The higher
the value of these indices, the more risky the scenario they measure.
7
https://carbonpricingdashboard.worldbank.org/
50

Appendix B PSM results
This section presents the property score matching (PSM) for all firm-level analyses. Table
B1 reports the results of testing the cost channel (performance effect) after PSM. We use
the nearest neighbor matching approach. The cost channel exists in all specifications,
and the coefficients are generally larger than those obtained using the standard DID
approach. Table B2 reproduces Table 6, as well as after PSM using the same nearest
neighbour-matching approach. Once again, we confirm that only ∆ROA(−1, 2) has a
significant negative link with ETS implementation.
The balance diagnostics for both cases are reported in Table B3. It is clear that the
characteristics of the treatment and the control groups after matching are generally not
significantly different (except age in the post-acquisition performance regressions).
51

Table A1: Countries adopting carbon-pricing initiatives and their respective years of
implementation
This table lists countries with all carbon initiatives, including the ETS and carbon tax,
and the associated year of implementation. The information in this table is obtained from
the World Bank. Regional ETS refers to the EU ETS.
Country National/Regional ETS Subnational ETS Carbon tax
Hungary 2005
Iceland 2005 2010
France 2005 2014
Denmark 2005 1992
Spain 2005 2014
Finland 2005 1990
Italy 2005
United Kingdom 2005 2013
Bulgaria 2005
Malta 2005
Norway 2005 1991
Greece 2005
Slovenia 2005 1996
Belgium 2005
Ireland 2005 2010
Croatia 2005
Luxembourg 2005
Cyprus 2005
Poland 2005 1990
Netherlands 2005
Latvia 2005 2004
Sweden 2005 1991
Lithuania 2005
Estonia 2005 2000
Czech Republic 2005
Germany 2005
Portugal 2005 2015
Austria 2005
Canada 2007 2008
Switzerland 2008 2008
New Zealand 2008
Japan 2010 2012
United States of America 2012
China 2013
Kazakhstan 2013
Republic of Korea 2015
Ukraine 2011
Mexico 2014
Chile 2017
Colombia 2017
Argentina 2018
South Africa 2019
52

Table A2: Variable definitions and sources of data
This table lists all variables used in this study, including their abbreviations and def-
initions. Cross-border M&A deals are collected from the BVD-Zephyr Global M&A
Transaction Analysis Database. All other firm-level information is obtained from the
BVD-Osiris Global Public Company Analysis Database. Country-specific information is
collected from the World Bank, whereas the Vulnerability index is downloaded from the
Notre Dame Global Adaptation Initiative(ND-GAIN). Economic risks, financial risks and
political risks are from the International Country Risk Guide (ICRG); the higher the
value, the less risky the scenario it measures.
Abbreviation Variables Definition

(A) Dependent variables
Deals Cross-border M&A scale Country aggregate of cross-border M&A deals (log term)
ROA Financial performance Return on total assets at the firm level
∆ROA(−1, 1) Post-acquisition performance ROA 1 year after acquisition subtracts ROA 1 year before
∆ROA(−1, 2) Post-acquisition performance ROA 2 years after acquisition subtracts ROA 1 year before
(B) Country characteristics
WGI National governance World Government Index

Income Economic development GDP per capita (log term)
Growth Economic growth Annual percentage growth rate of GDP (%)
Resource Natural resources Ores and metals exports’ share of merchandise exports (%)
Trade Trade openness Total exports and imports’ share of GDP (%)
Vulnerability Physical climate risk Measuring climate exposure, sensitivity and adaptability.
T-risk Total country risk ICRG country risk index
F-risk Financial risk Financial risk index
E-risk Economic risk Economic risk index
P-risk Political risk Political risk index
(C) Firm characteristics
Size Size of a firm Market capitalization (log term)

Age Age of a firm Age of the firm (log term)
Leverage Capital structure Debt-asset ratio (%)
Cash Cash flow The ratio of cash flow to assets (%)
53

Table B1: PSM-DID regression results for ROA
This table reports DID regression results with PSM to test the ETS effect on firm-level
financial performance. The dependent variable in all regressions is the acquiring firm’s
return on assets (ROA) from 2002 to 2019. The indicator variable ET S is equal to 1 in a
country with an ETS; otherwise, it is equal to 0. For all regressions, we control for country
and year fixed effects, together with the country-year trend. Column 1 presents uncondi-
tional results. Column 2 includes a set of host country-specific control variables. Column
4 controls for the acquirers’ home-country control variables. Column 5 includes both
host- and acquiring-country controls. Country-specific control variables include “Host_”,
referring to target firms’ host-country variables, and “Acq_”, referring to acquiring firms’
home country variables. Robust standard errors clustered at the country level are in
parentheses. *, ** and *** denote 10%, 5% and 1% levels of significance, respectively.
ROA (1) (2) (3) (4) (5)
ETS -0.439* -0.381*** -0.417*** -0.384*** -0.422***

(0.230) (0.088) (0.091) (0.089) (0.092)
Size 1.589*** 1.588*** 1.612*** 1.611***
(0.117) (0.117) (0.119) (0.118)
Age 0.837*** 0.843*** 0.849*** 0.855***
(0.266) (0.266) (0.257) (0.257)
Leverage -0.054*** -0.054*** -0.054*** -0.054***
(0.004) (0.004) (0.004) (0.004)
Cash 0.776*** 0.776*** 0.776*** 0.776***
(0.013) (0.013) (0.013) (0.013)
Constant 2.567*** -33.003*** -28.505*** -22.350*** -18.423***
(0.118) (2.321) (4.526) (5.332) (6.166)
Firm level controls No Yes Yes Yes Yes
Host country controls No No Yes No Yes
Acquiring country controls No No No Yes Yes
Firm fixed effect Yes Yes Yes Yes Yes
Year fixed effect Yes Yes Yes Yes Yes
Country-Year trend Yes Yes Yes Yes Yes
Observations 54,953 54,953 54,953 54,953 54,953
R-squared 0.593 0.811 0.811 0.811 0.811
54

Table B2: Post-acquisition analysis based on PSM
This table tests whether ETS affects post-acquisition performance based on PSM. The
dependent variables are ∆ROA(−1, 1) in Columns 1-4 and ∆ROA(−1, 2) in Columns
5-8, representing post-acquisition performance. They are calculated by subtracting ROA
1 or 2 years after the deal by ROA 1 year before the deal (Golubov and Xiong, 2020;
Dong et al., 2021). ETS is a dummy variable equal to 1 if the firm enters a country with
an ETS; otherwise, it is equal to 0. We control for size, age of the firm, leverage and
cash flows at the firm level. Columns 1 and 5 include only firm-level control variables,
Columns 2 and 6 include firm-level controls and host-country characteristics. Columns 3
and 7 include firm-level controls and acquiring-country characteristics. Columns 4 and 8
include firm-level controls and both host and acquiring country-specific control variables.
Robust standard errors clustered at the country level are in parentheses. *, ** and ***
denote 10%, 5% and 1% levels of significance, respectively.
(1) (2) (3) (4) (5) (6) (7) (8)

∆ROA(−1, 1) ∆ROA(−1, 2)
ETS -0.319 -0.130 -0.320 -0.135 -0.701*** -0.693** -0.714*** -0.741**

(0.202) (0.299) (0.200) (0.296) (0.209) (0.301) (0.213) (0.307)
Size -1.179*** -1.181*** -1.132*** -1.134*** -2.434*** -2.437*** -2.344*** -2.346***
(0.230) (0.230) (0.235) (0.235) (0.315) (0.315) (0.313) (0.313)
Age -1.132 -1.128 -1.168 -1.164 -0.510 -0.514 -0.527 -0.530
(0.692) (0.691) (0.716) (0.713) (0.651) (0.650) (0.660) (0.658)
Leverage 0.067*** 0.067*** 0.066*** 0.066*** 0.093*** 0.093*** 0.093*** 0.093***
(0.017) (0.017) (0.017) (0.016) (0.018) (0.018) (0.018) (0.018)
Cash 0.029 0.029 0.028 0.028 -0.124*** -0.123*** -0.126*** -0.125***
(0.037) (0.037) (0.037) (0.038) (0.041) (0.041) (0.041) (0.041)
Constant 23.536*** 22.401*** 45.553*** 44.462*** 47.376*** 42.081*** 81.526*** 75.545***
(5.058) (5.215) (12.727) (11.113) (6.601) (7.432) (13.235) (13.731)
Host country controls No Yes No Yes No Yes No Yes
Acquiring country controls No No Yes Yes No No Yes Yes
Firm fixed effect Yes Yes Yes Yes Yes Yes Yes Yes
Observations 14,648 14,648 14,648 14,648 13,210 13,210 13,210 13,210
R-squared 0.345 0.345 0.345 0.345 0.375 0.375 0.376 0.376
55

Table B3: Post-acquisition analysis based on PSM
This table reports the PSM balance test for the cost channel (Panel A), and for post-
acquisition (Panel B). We use the nearest neighbour matching approach in both cases.
Panel A. PSM balance test for cost channel test

Mean Difference P-values
Treated Control
Size Unmatched 19.884 19.371 0.513*** 0.000
Matched 19.884 19.877 0.007 0.740
Age Unmatched 3.295 3.111 0.184*** 0.000
Matched 3.295 3.144 0.151 0.765
Leverage Unmatched 51.359 48.369 2.990*** 0.000
Matched 51.359 51.516 -0.157 0.338
Cash Unmatched 5.699 3.869 1.830*** 0.000
Matched 5.699 5.697 0.002 0.987
Panel B. PSM balance test for ∆ROA(−1, 2) regressions
Size Unmatched 20.429 20.337 0.092** 0.030
Matched 20.429 20.409 0.020 0.485
Age Unmatched 3.163 3.107 0.056*** 0.003
Matched 3.163 3.126 0.037*** 0.003
Leverage Unmatched 52.697 51.739 0.958*** 0.009
Matched 52.697 52.617 0.080 0.746
Cash Unmatched 6.903 6.113 0.790*** 0.001
Matched 6.903 7.133 -0.230 0.117
56

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Emission Trading Schemes and Cross-Border Mergers

c Institutes of Science and Development, Chinese Academy of Sciences

The emission trading scheme (ETS) provides a market mechanism to mitigate

JEL: F21, G32, G34, Q54

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2 Literature Review and Hypothesis Development

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3 Data and Model

3.1 Data Description

To investigate the role of climate policies (represented by ETS implementation) in cross-

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(Insert Figure 1 here)

(Insert Figure 2 here)

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(Insert Table 1 here)

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3.2 Model Setup

Taking ETS implementation as a quasi-natural experiment, both the relocation effects

Yit = α + β1 ET Sit + γXit + λi + δt + ηit + εit (1)

Pjit = α + β2 ET Sit + γXijt + θZjt + λj + δt + ηjt + εjit (2)

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Mit = α + β3 ET Sit + γXit + λi + δt + ηit + εit (3)

Yit = α + β4 ET Sit + θMit + γXit + λi + δt + ηit + εit (4)

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4.1 Relocation Effect of ETS Implementation

(Insert Table 2 here)

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4.2 Is Acquirers’ Performance Affected by ETS?

(Insert Table 3 here)

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4.3 Risk Channel

(Insert Table 4 here)

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4.4 Tests on the DID Models

(Insert Figure 3 here)

(Insert Figure 4 here)

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(Insert Figure 5 here)

5.1 Sectoral Effects

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(Insert Figure 6 here)

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(Insert Figure 7 here)

(Insert Figure 8 here)

(Insert Table 5 here)

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5.2 Post-Acquisition Performance with ETS

∆ROAjt = α + βET Sit + γXijt + θZjt + λj + δt + εjt (5)

We follow Golubov and Xiong (2020) by using ∆ROA(−1, 1) = ROA(1) − ROA(−1)

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(Insert Table 6 here)

5.3 Including All Carbon-Pricing Initiatives

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(Insert Table 7 here)

ETS -0.448 -0.383* -0.400* -0.390* -0.408***

ETS -0.439* -0.381* -0.417* -0.384* -0.422*