Abstract
Regulators impose sanctions on firms that violate environmental laws or regulations not only to punish the violators but also to warn non-sanctioned firms that environmental misbehaviors may be penalized. Accordingly, non-sanctioned firms are motivated to respond to such sanction threats. Combining problemistic search and threat rigidity theories, we propose that rising environmental regulatory sanctions on industry peers can propel non-sanctioned firms to focus on local search and refrain from distant search, resulting in an increase in environmental lobbying, a direct and immediate strategic action that we consider as an outcome of local search, and a decrease in green innovation, an indirect and long-term strategic action that we consider as an outcome of distant search. We also propose that such effects are stronger when non-sanctioned firms find peer sanctions a more salient threat, reflected by higher media exposure of non-sanctioned firms’ environmental misbehaviors. Using a U.S. sample of 5,893 firm-year observations, we find support for our arguments. This study reconciles problemistic search and threat rigidity theories by highlighting the heterogeneous influence of external threats on local search and distant search and showcases the spillover effect of regulatory sanctions on peer firms.
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