To Acquire or to Ally? Managing Partners’ Environmental Risk in International Expansion

Environmental risk (ER) has become increasingly crucial in international business, and firms endeavor to integrate environmental risk management (ERM) into business strategies. Examining a sample of cross-border mergers and acquisitions (M&As) and alliances conducted by US firms from 39 host countries over the last two decades, we show that US firms tend to prefer to choose cross-border M&As over alliances when the ER of foreign partners is high, consistent with the prediction of a mean-variance utility model. The propensity towards M&As is amplified by US firms’ corporate governance quality, financial flexibility, and adherence to the host-country’s sustainability disclosure reforms. Further, US firms experience high announcement abnormal returns when they select M&A deals rather than alliances to manage high ER from foreign partners. Overall, our study provides novel insights into ERM in firms’ decision-making around international expansion.