Decisions under complexity: accounting for circular economy in M&A deals

Purpose The authors examine whether mergers and acquisitions (M&A) deals motivated by circular economy (CE) purposes generate superior postdeal financial performance for acquirers and how due diligence activities conducted by buyers act as an explanatory mechanism. This study aims to build on competing conjectures regarding whether CE-oriented deals lead to superior performance because the inherent complexity of circular business models requires more extensive due diligence scrutiny, or because value-increasing outcomes can be achieved through a facilitated and faster evaluation process, driven by signaling reliability and the perceived trustworthiness associated with ethical and sustainability-oriented practices. Design/methodology/approach The study analyzes a sample of 2,877 European M&A transactions completed between 2012 and 2023. CE-oriented deals are identified through textual analysis of deal information. The authors use ordinary least squares regressions and mediation models to test the association between deal circularity, acquirers’ postdeal financial performance and the duration of the due diligence process. Findings The authors find that CE-oriented deals are associated with higher acquirers’ financial performance, but only in the medium-to-long term and that these deals are characterized by longer due diligence periods, which positively mediate the association between circular orientation of the M&A deal and acquirers’ postdeal performance. Practical implications The findings suggest that due diligence in sustainability-linked corporate decisions should be viewed as economically meaningful rather than a costly procedural delay. Originality/value The evidence supports the view that the complexity of circular business models requires more extensive predeal verification, which is also value-increasing for buyers. Thus, whereas CE is relevant in the M&A setting, the study hints the idea that the performance gains stem from deeper information acquisition rather than reduced information frictions.