Abstract
We examine the effect of corporate environmental innovation (hereafter eco-innovation) on stock price crash risk and document a significant negative association. Utilising a large sample of publicly listed U.S. firms for the period 2003 to 2017, we find that an increase in eco-innovation from the 25th to the 75th percentile is associated with 17.62% reduction in stock price crash risk. This outcome remains robust to a variety of sensitivity tests and after accounting for potential endogeneity concerns. Eco-innovative firms attract more institutional investors and equity analyst following and disclose more information leading to lower stock price crash risk. Additional tests reveal that the negative effect of eco-innovation is contingent on the political leadership's ideology and environmental sensitivity. Our paper contributes to the ongoing discourse on the costs and benefits of eco-innovation, documenting the value-enhancing perspective of eco-innovation.
Highlights
We find that an increase in eco-innovation from the 25th to the 75th percentile is associated with a 17.62% reduction in stock price crash risk
We find that Eco-Innovation measure is negatively and significantly correlated with both measures of stock price crash measures, namely negative conditional skewness (NSKEW) and down-to-up volatility (DUVOL)
The results reported in columns (1) and (2) indicate that the negative association between eco-innovation and stock price crash risk is more pronounced in the High Quoted Spread subsample compared with the Low Quoted Spread subsample
Summary
We examine whether environmental innovation (hereafter eco-innovation) has any impact on stock price crash risk. Our study is motivated by fairly recent catastrophic environmental incidents, such as the 2010 B P Deepwater Horizon oil spill in the Gulf of Mexico, and the 2015 Volkswagen emissions scandal that triggered extensive media coverage and negative reaction from investors (Jain & Zaman, 2020). These criticisms, along with recent legislative/regulatory developments and much more focus on socially responsible investment (SRI) and protecting the environment, have forced companies’ management to consider environment-focused innovation as an effective strategy to gain a competitive advantage (Cheng, Yang, & Sheu, 2014; Metcalf, Mackelprang, & Galbreth, 2016; Xue, Zhang, & Li, 2020; Zaman, Jain, et al, 2020). Having established a negative association between eco-innovation and stock price crash risk, we empirically tested our underlying assumption that institutional investors and equity analyst under the clientele effect of SRI are directed to eco-innovative firms and their presence limits information asymmetry, which in turn curtails the stock price crash risk. Prior studies focusing on consequences of firm innovativeness have examined the impact of patent innovation on stock return (Hirshleifer, Hsu, & Li, 2013), corporate stock price crash risk (Ben-Nasr et al, 2021), default risk (Hsu, Lee, Liu, & Zhang, 2015), and market risk premium (Hsu, 2009) None of these studies has captured the nuances associated with green innovation such as eco-innovation.
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