GREEN CREDENTIALS

Acquiring green firms can be healthy for a company's bottom line

By our News Team | 2023

Researchers analyse stock market reactions to big corporates buying ‘green’ businesses and find there’s often a bottom-line benefit.

In good news for companies looking to add to their green credentials, a Canadian study has found that, when firms acquire businesses specialising in green technologies or green brands, the buying company usually sees a positive stock market reaction.

Yuyan Wei, an assistant marketing professor at Concordia University, and her colleague Devashish Pujari from McMaster University, analysed almost 200 green firm acquisitions by publicly traded US companies between 2000 and 2018.

Photo by Anna Shvets from Pexels

The researchers published their paper, titled ‘Does buying green pay off? Stock market reactions to green acquisitions’, in the academic journal Industrial Marketing Management.

“We wanted to link green strategy efforts to firms’ financial performance, such as stock value and return on investment,” Wei explains.

While many studies have looked at consumers’ perceptions of firms’ green efforts, Wei and Pujari’s study of stock market perceptions is claimed to be the first of its kind.

The researchers investigated the performance of 182 firms that announced acquisitions of green entities. They considered the stock price performances over a three-day window: the day before, the day of, and the day after an acquisition announcement. Based on this data, the researchers reported three principal findings.

Firstly, shareholders generally welcomed news of green acquisitions. The initial outlay is usually substantial. However, by acquiring valuable resources, expertise, technologies and powerful brands, these companies will likely ensure long-term profitability.

Secondly, the news is especially welcomed if the buyer has highly developed marketing expertise and is not considered an industry innovator.

Buyers can effectively communicate their green efforts

“This means buyers can effectively communicate their green efforts and have a great capability in being able to sense which trends will be perceived positively by the general public,” Wei says.

“Investor and public reaction will be better for firms with lower innovation capabilities. It could be that shareholders might expect firms with higher innovation capability levels to be putting their innovation/research and development budgets … into developing their own green products.”

The third finding applies to buyers with greater marketing expertise. The research showed that benefits will be reduced if the buyers belong to industries sensitive to environmental regulations – in other words, companies operating in so-called ‘dirty’ industries.

Wei says she believes that this might be due in part to an increasing awareness of corporate greenwashing and the associated risk it entails.

“If firms from dirty industries genuinely want to improve people’s well-being and mitigate their negative effects on the environment, they may need to do something that is beyond buying green brands or technologies,” Wei notes.

“Investors are learning which firms are genuine in their commitments to a cleaner environment, and whether their efforts are genuine or mere greenwashing. With these expectations in mind, [investors] have different reactions to a firm’s green efforts. [Those reactions] will be played out in the stock market.”

Concludes Wei: “Companies should be more cautious if they think they can convince the public of their green credentials simply by buying these kinds of green firms.”

You can read more about the study here.