Environmental Performance and the Market for Corporate Assets

• Date: 01 December 2017
• Published date: 01 December 2017
• DOI: http://doi.org/10.1002/smj.2670
• Author: Luca Berchicci,Glen Dowell,Andrew A. King

Strategic Management Journal

Strat. Mgmt. J.,38: 2444–2464 (2017)

Published online EarlyView 10 July 2017 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2670

Received 22 September 2015;Final revision received13 March 2017

Environmental Performance and the Market

for Corporate Assets

Luca Berchicci,1Glen Dowell,2,*and Andrew A. King3

1Rotterdam School of Management (RSM), Erasmus University Rotterdam,

Rotterdam, The Netherlands

2Johnson Graduate School of Management, Cornell University, Ithaca, New York

3Dartmouth College, Tuck School of Business, Hanover, New Hampshire

Research summary: Scholars and policy-makers have tended to assume that asset sales have a

negative effect on stakeholders, but quantitative evidence to inform the debate has been scarce.

In our research, we explored one way such sales could be benecial: by facilitating the transfer

of specialized capabilities used for environmental improvement. Employing quantitative data

from a longitudinal sample of U.S. manufacturers,we nd evidence consistent with the transfer of

capabilities to or from acquired assets. Our results inform theories of ownership change and the

conditional ow of capabilities among operations. They provide evidenceas well of the existence

of environmental capabilities. For policy-makers they provide needed evidence and insight on the

merits of regulations designed to limit asset sales.

Managerial summary: It is often assumed that acquisitions harm environmental

performance--acquisition leads to greater emphasis on efciency, while focusing on envi-

ronmental performance is driven by managerial discretion. We propose instead that acquisitions

might lead to improvement in environmental outcomes; the key is in knowing where to look for

improvement. We studied thousands of facility-level acquisitions and nd that when a clean rm

buys a facility from a dirtier rm, that facility’s environmental performance improved. When a

dirtier rm buys from a cleaner one, however, it is the dirtier rm’s other facilities in the same

industry of the target that improved. These results, along with extensions we undertook, suggest

that managers and policy-makers should view acquisitions as conduits rather than impediments

in transferring environmental capabilities. Copyright © 2017 John Wiley & Sons, Ltd.

Corporations are uid entities, with as many as

7% of manufacturing facilities being sold from one

corporation to another in a given year (Maksimovic

& Phillips, 2001). Many academic studies have

explored the consequences of such asset sales, but

despite this effort, much still remains to be known

about when and how these transfers in ownership

create value for the acquiring rm, the acquired

asset, or society as a whole (Eckbo, 2013). Thus

Keywords: asset sales; environmental; capabilities;

matching; post-acquisition performance

*Correspondence to: Glen Dowell, Cornell University,Sage Hall,

Ithaca, NY 14853. E-mail: gwd39@cornell.edu

Copyright © 2017 John Wiley & Sons, Ltd.

far, most research has focused on the effect of

ownership changes at the rm level, usually by

analyzing the response of nancial markets (D. R.

King, Dalton, Daily, & Covin, 2004). A smaller

literature has considered the effect of acquisitions

on facility-level productivity (Lichtenberg, Siegel,

Jorgenson, & Manseld, 1987; Mingo, 2013). Such

analyses are important for investigating the effect

of asset sales on the delivery of private goods

and services, but they do not fully capture their

broader social consequences. In their summary of

the literature, Haleblian et al. (2009: 488) note the

need for more research on “the effect of acquisitions

on stakeholders other than shareholders.”

Environmental Performance and the Market for Corporate Assets 2445

One way that stakeholders such as communi-

ties and employees may be affected by acquisitions

is through changes in environmental performance,

such as the generation of toxic waste in the course

of production. These effects are a subject of public

interest and policy debate, but no quantitative study

has investigated the effect of asset sales on envi-

ronmental performance. This inattention is unfor-

tunate for at least two reasons. First, information

on the effect of assets sales would provide guid-

ance to stakeholders and policy-makers who are

concerned with environmental outcomes. Second,

such empirical analysis could provide an opportu-

nity to advance theories of both acquisitions and of

the effect of corporate ownership on environmental

performance.

Existing scholarship leads to differing predic-

tions regarding the likely effect of asset sales on

environmental performance. A long theoretical and

empirical tradition supports the contention that

asset markets discipline the actions of pro-social

managers and thereby limit the ability of rms

to provide social services such as environmental

protection (Betton, Eckbo, & Thorburn, 2008).

Consequently, asset sales could harm environmen-

tal stakeholders by removing “green” managers

from positions of control and replacing them with

managers more focused on stockholder returns. A

rival prediction, however, arises from the growing

literature on capabilities and environmental perfor-

mance (Berchicci, Dowell, & King, 2012). Several

scholars contend that differences in specialized

capabilities determine varying levels of environ-

mental performance (Hart, 1995; Hart & Dowell,

2011; Porter & Van der Linde, 1995). If so, assets

sales could improve performance by facilitating

the transfer of capabilities to locations where

they are needed (Berchicci et al., 2012; Diestre &

Rajagopolan, 2011).

A few case histories are often cited as demon-

strating that the former, market discipline,

perspective is most predictive (Gelles, 2015).

In one example, the Pacic Lumber Company

(PALCO) was raided by Charles Hurwitz and his

nancial supporter Michael Milken. To pay back

the bonds that funded the acquisition, Hurwitz

degraded PALCO’s social and environmental per-

formance, ending a scholarship program, tripling

the cut-rate of trees, and ordering the clear-cutting

of a protected old growth stand. The later sale of

the iconic and progressive rm Ben and Jerry’s

to Unilever reinforced beliefs that asset markets

impeded the social performance of public rms.

Inspired in part by these cases, advocates proposed

the creation of legal entities designed to protect

managers from the discipline of asset markets.

One of these, the Benet Corporation, is intended

to protect pro-social managers who might feel

they must sell their operations even if doing so

“compromised their own social and environmental

values” (André, 2012: 133).

Such policy proposals discount the potential for

asset sales to provide access to benecial capabil-

ities, yet a large literature in strategic management

argues that capabilities of all types are not homoge-

nously distributed across rms, and their location

powerfully inuences observed performance

(Helfat et al., 2009). If specialized environmental

capabilities are indeed important, then acquisitions

might improve performance by easing their transfer

to locations where they are needed. Unfortunately,

quantitative research on the effect of asset sales

on environmental performance has been limited to

evaluating strategic decisions such as acquisition

or expansion, and has not analyzed performance

consequences (Diestre & Rajagopolan, 2011). Yet,

there is reason to expect that acquisitions inuence

environmental outcomes. Berchicci et al. (2012)

examine the ip-side of this issue and nd that

acquisition choice is inuenced by environmental

capabilities, as rms are more likely to acquire facil-

ities that have similar environmental performance

to their existing facilities, and that this tendency

strengthens for more physically distant targets. In a

post-hoc analysis, they also nd initial evidence that

environmental capabilities change at acquired facil-

ities. However, they neither explain whether and

how acquisitions have an effect on newly acquired

targets’ or existing facilities’ environmental per-

formance, nor explore possible mechanisms for

performance changes. We analyze the same Toxics

Release Inventory data that Berchicci etal. use and

extend their paper both theoretically and empiri-

cally, in order to nd evidence whether environ-

mental capabilities potentially inuence both acqui-

sition choice and are in turn inuenced by acquisi-

tions. In our research, we develop and test hypothe-

ses predicting situations in which asset-sales

might facilitate performance improvement within

either acquired units or incumbent operations. Our

analysis advances understanding of how environ-

mental capabilities are deployed, and the extent

to which corporate ownership matters for envi-

ronmental performance. Although the concept of

Copyright © 2017 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 2444–2464 (2017)

DOI: 10.1002/smj