Green M&A and legitimacy benefits. Green M&A refers to the merge and acquisition that incorporate the environmental rationalized elements in firms’ strategic decisions to gain survival resources and competitive capabilities, and achieve sustainable development (Pan, Liu, Qiu, & Shen, 2019; Li et al., 2020). One of the most salient features of green M&A is that the environmental elements run through the entire transaction process from the target selection, contract signing, until the end of the M&A to realize the unification of financial performance and social performance (Pan et al., 2019). Different from various types of green management and investments, firms can use green M&A to achieve rapid transformation and competitive advantage. From the characteristic and cost of green M&A, we believe that green M&A is a specific method to maintain strategic consistency and a sincere response to environmental appeals.
Green M&A has broadly similar functions to other M&A activities that can obtain value creation (Deng, Kang, & Low, 2013), such as efficiency (Banker, Chang, & Cunningham, 2003) and resource redeployment (King, Slotegraaf, & Kesner, 2008). Therefore, firms as acquirers can gain clean energy and energy-saving technology from targets in green transformation and transition. Firms need a substantial amount of money, human capital, new technology, and time to produce green transformation for long-term investments, which may not be effective. These tangible resources and intangible resources are core competencies for the competitive advantage and diversification of firms. Thus, most firms face the problem of investing more in transformation. However, such investment is fruitless and may even damage the survival and development of firms due to the misuse of resources. Hence, firms are cautious and passive in the face of environmental pressure, such as green management and transformation.
Green M&A is undoubtedly the best solution to liberate firms from this dilemma so far. Instead of spending a shedload of money on new technology and advanced equipment, firms are better off developing the target’s existing technology, production lines, and skilled technicians, which would not only greatly improve the efficiency but also reduce the cost of green management and transformation.
Beyond promoting green technological innovation and strengthening industrial upgrading, firms must respond to the environmental pressure and legitimacy crisis as well as gain recognition and trust from the government, the public, and society. This strategy is a valuable, unique, and intangible resource for firms, which further facilitates and consolidates their legitimacy.
In general, strategic consistency can convey a sincere signal to the public and society. Without equivocation or ambiguity, green M&A is regarded as a typical representative. Scholars use peculiarities and temperaments to interpret the movement of actors (Gilbert & Malone, 1995). For example, when a person accomplishes a good deed, the public will have a favorable perception of him/her, whereas when an individual does something bad, the public will believe he/she is a disagreeable person (Yoon, Gürhan-Canl, & Schwarz, 2006). A firm implements green M&A to prove to society that its values are in line with its actions. Hence, the public would perceive that the firm’s green transformation and environmental protection is sincere and not merely a ploy, thereby expressing good will and trust toward the organization. In turn, the firm will promote reputation and legitimacy to make use of the corresponding good will and trust in the future. This scenario is a vivid description of the legitimacy-benefit that originates from strategic consistency. In addition, this perceived sincerity would make the public believe that the image of the corporate brand is sustainable and not disposable (Childs, Woo, & Kim, 2019).
Green M&A and illegitimacy penalty. However, in reality, a portion of firms engaging in M&A still pollute the environment. If the situation of environmental pollution does not improve after the implementation of green M&A, the public will conclude that action is merely an instrument of greenwashing and that the firm is hypocritical in environmental governance and green transformation. Hypocrisy is a serious negative label for an organization (Christensen, Morsing, & Thyssen, 2020), as this image implies that the firm does not implement what it declares it would do (Weick, 1995). When the firm cannot make its actions correspond with its words, the public and society will doubt the sincere motivation of its strategic actions and may lead to suspicion and distrust toward the company’s strategic decisions (Childs et al., 2019). This issue is the major cause of hypocrisy. We conclude that hypocrisy is a negative perception made by stakeholders of an organization (Carlos & Lewis, 2018) and the consequence of strategic inconsistency (Brunsson, 2007). Although hypocrisy does great harm to firms, a great number of organizations still regard symbolic strategy as the first choice in dealing with complex institutional pressure, which has drawn growing criticism directed at the hypocrisy and decoupling behaviors of companies in solving social and environmental concerns (Andersen & Høvring, 2020). Such hypocrisy and decoupling behaviors are more common in environmental governance, which is generally referred to as greenwashing.
Strategic inconsistency makes stakeholders doubt the motivation behind organizational behavior; hence, they will not react as the organization expects (Yoon et al., 2006). Particularly hypocrisy will occur when bias and incongruity exist between the value and behavior of the organization (Effron, Lucas, & Connor, 2015). The perception of hypocrisy in environmental governance and green transformation is caused by greenwashing. Greenwashing refers to the calculated tactic of firms attempting to cover up environmental misconducts in the name of greening (Du, 2015). Du (2015) discovered that approximately 98% of products allegedly engage in greenwashing to mislead the public.
Specifically, when firms select green M&A as a greenwashing instrument for symbolic response to environmental pressure, environmental pollution still exists and may even worsen. Greenwashing only responds to such pressure, but it does nothing about this issue. Such symbolic actions, once observed by investors, consumers, governments, media, and members of the public, will cause negative effects. Moreover, as a major strategic activity of firms, green M&A has long and high-level exposure, which easily attracts the attention of stakeholders. As a result, if firms implement green M&A as a tool of strategic inconsistency, they will run the risk of being perceived as hypocrisy. Moreover, the internal stakeholders, including shareholders, investors, and employees, or external stakeholders, such as consumers, governments, media, and the public, will focus on green M&A, questioning the reliability, sincerity, and veracity of firms’ strategic motives. These actors may consider that companies are acting benevolently. In reality, these firms are being hypocritical. Hence, the stakeholders will make negative comments on the firms’ green M&A. The negative impression of stakeholders impedes the corporate fulfillment of development. Moreover, the boom in the stakeholders’ skepticism entails more rigorous discrimination and close scrutiny from external stakeholders (Parguel, Benoît-Moreau, & Larceneux, 2011). To avoid external stakeholders’ scrutiny, companies will not be willing to take huge risks to engage in hypocritical strategic activities.
Concerned about the long-term negative impacts, organizations are willing to avoid image and reputational damage caused by hypocritical greenwashing. Accordingly, from the perspectives of legitimacy-benefit and illegitimacy-penalty, our baseline argument is that green M&A is a sincere response in corporate environmental governance, which can reduce environmental violation.
Therefore, we put forward the following baseline hypothesis:
Baseline Hypothesis: Green M&A is positively associated with corporate environmental governance.
When Will Organizations Be Sincere?
The above inference shows that organizations select sincere green M&A rather than hypocritical greenwashing to gain legitimacy-benefit while avoiding illegitimacy-penalty. However, the existing research has yet to analyze the conditions that encourage firms to adopt sincere strategic consistencies. The distance between “talk” and “walk” determines the sincerity or hypocrisy of corporate strategy. Specifically, the greater the distance between words and deeds, the lower the strategic consistency, which indicates that the firm is hypocritical. When the distance between words and deeds is smaller, the strategic consistency is higher, thus indicating that the firm is sincere. Notably, this condition is necessary but not sufficient (Carlos & Lewis, 2018). Only when the sincerity or hypocrisy of the strategy is perceived by stakeholders can it lead to the legitimacy-benefit or illegitimacy-penalty of the firm. Thus, legitimacy-benefit and illegitimacy-penalty are magnified in some cases, whereas they are reduced in others. Moreover, we ensure the conditions under which strategic consistency or strategic inconsistency is perceived, namely, media scrutiny and SOEs. These conditions influence the likelihood that an organization will take green M&A as a substantive strategic action.
Media Scrutiny and Strategic Consistency
Generally speaking, media coverage plays a vital impact on the corporate strategic behaviors and information transmission, especially on corporate social responsibilities, such as environmental governance (Zyglidopoulos, Georgiadis, Carroll, & Siegel, 2012). On the one hand, media attention can reduce information asymmetry between firms and stakeholders (McWilliams & Siegel, 2001; Saxton & Anker, 2013). Stakeholders lack direct channels to communicate and feedback information with firms. However, media attention makes up for this shortcoming. As an intermediary between firms and outside stakeholders in the transmission and exchange of information, the media delivers the strategic information on corporate environmental governance to the public. Consumers and the public often interact with firms through the media, which is one of the legal sources for stakeholders to obtain information on corporate finance and social responsibility. At the same time, the media would reflect the public’s demands and expectations to firms. On the other hand, the media undertakes social responsibility and the obligation of a supervisor or “watchdog” (Miller, 2006; Du, 2015). Through the selective reporting of corporate news events (Brown & Deegan, 1998), the media can arouse public attention and pressure, change consumers’ cognition and attitude toward brands, and influence corporate image and reputation (Zyglidopoulos et al., 2012; Jia, Tong, Viswanath, & Zhang, 2016).
Compared with corporate positive deeds, such as receiving commendations and honors, the media is more keen to report corporate negative news, such as environmental pollution, financial fraud, and scandal, to gain high exposure and make huge profits. As the Chinese proverb goes, “For evil news rides fast, while good news baits later” (hao shi bu chu men huai shi chuan qian li in Chinese). Previous studies have found that media scrutiny promotes companies to disclose environmental information and reduce environmental pollution (Tang & Tang, 2016). Therefore, as an informal system, the media can make up for the deficiency of formal systems, such as environmental regulation, and become an important force to scrutinize corporate environmental behaviors.
The above roles of the media entail that companies should pour attention into their image and reputation. In particular, the activities of listed and multinational companies are more conspicuous and noticeable (Garcia-Sanchez, Cuadrado-Ballesteros, & Sepulveda, 2014). Their strategic actions are more easily scrutinized by the media than other companies. Therefore, to avoid the risk and illegitimacy-penalty of negative news being publicized by the media (Glozer & Morsing; 2020), organizations greatly concentrate on facilitating corporate social responsibility (CSR) activities related to the environment and charity (Lindgreen, Swaen, & Johnston, 2008). Otherwise, the enormous amount of negative exposure in the press becomes a major crisis for companies. For example, Shell, the oil giant, has responded to public concerns about the environment by proposing a “Net Zero Emissions” slogan, which has drawn intense criticism in the press (Christensen et al., 2020). The media has reported that mining for oil would pollute the surrounding environment and damage the fragile ecology. Hence, the slogan is evidently hypocritical and far from the actual business model. Similarly, BP’s reputation has been damaged by negative media coverage for slogans that are incongruent with reality (Christensen et al., 2020). The media scrutiny and coverage expose hypocritical corporate strategies to the public. Companies take huge risks to engage in hypocritical actions in the face of strict media scrutiny and rapid exposure (Delmas & Burbano, 2011). Once exposed, the damage to corporate image and reputation is immeasurable and even difficult to repair. Well-known dairy companies Mengniu Milk and Yili Milk have been involved in the milk powder scandal; since then, their reputations have been in a slump (Du, 2015). Despite the companies’ repeated attempts to repair their brand value and image, they have difficulty escaping from the shadow of the melamine issue in recent years.
The media is like a magnifying glass that enlarges corporate strategic actions, which can improve legitimacy-benefit or aggravate illegitimacy-penalty. Media scrutiny can help investors analyze more clearly even if companies seem green and responsible. When the firm is regarded as hypocritical by the media, media scrutiny and propaganda will carry serious illegitimacy-penalty, thus resulting in an undesirable social impact. Public pressure will cause turbulence in the capital market (Bednar, 2012). Therefore, scholars have advocated companies to implement sincere greening actions rather than hypocritical greenwashing strategies (Morsing & Spence, 2019).
In sum, when companies face strong media scrutiny and legal threat, they will be more likely and encouraged to accomplish sincere green M&A actions as much as possible to reduce environmental violations. We believe that if a firm is located in an area with a high level of media development, the focal organization will face stronger ability to supervise corporate hypocritical behavior between words and deeds. Such scrutiny raises the probability that governments and the public will perceive hypocritical greenwashing, which will rigidly discipline corporate behaviors. Such results would lead firms to exhibit sincerity rather than engage in greenwashing. Hence, we predict the following:
Media scrutiny strengthens the positive relationship between green M&A and corporate environmental governance.
State-owned Enterprise (SOE) and Strategic Inconsistency
An SOE is a specially operated and public service organization (Córdoba-Pachón, Garde-Sánchez, & Rodríguez-Bolívar, 2014). Specifically, the state has ownership or control over the capital of such enterprise. In fact, the will and interests of the government determine the behaviors of SOEs. SOEs have both commercial and commonweal characteristics (Heath & Norman, 2004; Cunningham, 2011). On the one hand, SOEs pursue the preservation and appreciation of state-owned assets. On the other hand, SOEs bear the responsibility of regulating the national economy. SOEs are mainly used to solve the problems of employment difficulties and unbalanced industrial development to promote the development of the national economy (Dewenter & Malatesta, 2001). Previous studies have found that SOEs, as an important force of national economy, have a key impact on regional development and social practice (Spence, Schmidpeter, & Habisch, 2003) and therefore deserve special attention (Córdoba-Pachón et al., 2014; Rodríguez-Bolívar, Garde-Sánchez, & López-Hernández, 2015).
In theory, SOEs should take the initiative to assume the responsibility and obligation for the environment and society. In addition, they should play their macro-control role in maintaining social stability at the beginning of their establishment. However, the reality is not so. For example, Sinopec, a stated-owned oil and gas giant in China, is a Fortune 500 company. It is famous not only for its remarkable profits but also for its continuous environmental pollution incidents (Eaton & Kostka, 2017). Frequent pipeline leakage and pollutant discharge have caused serious pollution to the surrounding environment and even led to the death of residents. SOEs’ environmental pollution seems to be the norm rather than the exception contemporarily, especially in electricity, oil, and gas industries (Moon & Shen, 2010; Eaton & Kostka, 2017). SOEs, in particular, have become major sources of pollution.
From the perspective of legitimacy-benefit, SOEs’ natural political connections entail that they benefit less from implementing greening actions. First, the inherent status of SOEs gives them political legitimacy without effort (Li & Zhang, 2007). In other words, compared with private enterprises, SOEs do not need to spend much time, money, and human resources to acquire and maintain political connections. The inherent political connections helps SOEs gain priority in accessing vital governmental resources; thus, they do not need to win the attention of the government through social responsibility practices, such as issuing social responsibility reports and implementing greening actions (Ma & Parish, 2006; Li & Zhang, 2007; Marquis & Qian, 2014). However, given the lack of legitimacy, private enterprises regard legitimacy as a strategic need (Oliver & Holzinger, 2008) and take greening actions, such as green M&A, to cater the government and the public. Previous studies believe that private enterprises obtain governmental communication channels and legitimacy through charitable donations (Ma & Parish, 2006). Moreover, their returns from social responsibility are much high than those of SOEs (Wang & Qian, 2011; McGuinness, Vieito, & Wang, 2017). Such legitimacy-benefits are already available to SOEs. However, no extra legitimacy-benefits are produced for SOEs from strenuous green M&A activities.
Second, CEOs of SOEs generally have administrative levels and political backgrounds. Thus, they have no subjective incentives from engaging in green M&A. Scholars consider that these CEOs are key factors in determining whether enterprises should undertake environmental and social responsibility (Pedersen, 2006). Moreover, these leaders have a high degree of discretion and decision-making power (Rodríguez-Bolívar et al., 2015). Therefore, their understanding and commitment to green management decide corporate strategic actions in environmental governance (Williams & Schaefer, 2012). Indeed, before the Shanghai and Shenzhen Stock Exchanges required the release of CSR reports, the managers of SOEs did not consider participating in social practices to release CSR reports and adopting green management actions as their primary strategic tasks (Hu, Zhu, Tucker, & Hu, 2018). Even though CSR reports have been showing an evident growth trend since 2008 (Luo, Wang, & Zhang, 2017), SOEs’ CSR actions have always been regarded as a kind of window dressing and greenwashing behavior (Eaton & Kostka, 2017). Given that SOEs’ managers have higher social status and political background than private owners and entrepreneurs, they may not have positive and strong motivations to implement social practices and greening actions (Chen, Hung, & Wang, 2018). Private owners and entrepreneurs, by contrast, are eager to move closer to the government and shake off the stigma and discrimination from history (Marquis & Qian, 2014). As a result, we believe that SOEs’ CEOs can gain fewer legitimacy-benefits from social and environmental practices than private entrepreneurs. In sum, SOEs’ participation in environmental actions, such as green M&A, have little legitimacy-benefit.
From the perspective of legitimacy-penalty, political connections can have a protective effect, thus making SOEs less likely to be severely punished for polluting the environment. In terms of environmental protection, the research found that firms could use political connections to seek refuge, which leads to government deregulation (De Villiers, Naiker, & Van Staden, 2011). Under the protective effect, firms avoid environmental responsibility and arbitrarily commit environmental pollution, especially in SOEs (Van Rooij, Zhu, Na, & Wang, 2017). Thus, SOEs will not necessarily be punished for their hypocritical greenwashing in environmental governance. Even if SOEs are punished by the environmental administration, the losses and legitimacy-penalty are little. The complex administrative hierarchy in China could be a charter for unscrupulous greenwashing behaviors of SOEs, thus giving them the opportunity and ability to evade regulations (Eaton & Kostka, 2017).
The reality is crammed full of such situations, especially in central SOEs. Managers of SOEs often have dual positions in the Party and the government, thus leading to administrative levels higher than or equal to local officials (Walter & Howie, 2010). For instance, local officials in Shanxi province have no authority over the high-level North China Grid Company and even fear that too much environmental pressure on them could lead to retaliatory blackouts in the region (Eaton & Kostka, 2017). Evidently, the regulation of SOE is ineffective. The SOEs’ administrative-level problem has persisted throughout history (Walter & Howie, 2010; Brødsgaard, 2012), which makes SOEs have close contact with senior officials (Lo & Tang, 2006), thus providing them with condition and shelter to engage in greenwashing and pollute surroundings (Moon & Shen, 2010; Van Rooij et al., 2017; Chen et al., 2018).
In conclusion, we find that SOEs have natural political connections to offset legitimacy-benefit and shelter illegitimacy-penalty. We consider the state-owned status a kind of refuge for enterprises, which tend to engage in hypocritical greenwashing. Thus, we predict the following:
State-owned enterprises (SOEs) weaken the positive relationship between green M&A and corporate environmental governance.