The greening power of networks: Spillover effect of environmental penalties in director networks

Using data from a sample of Chinese firms, this study examines the spillover effects of environmental regulation within director networks. Our findings suggest that environmental penalties imposed on director-interlocked firms increases the green innovation of the target firms. These results remain robust after a series of endogeneity and robustness tests. The effect is moderated by internal monitoring mechanisms and external stakeholder concerns. In addition, the spillover effect is more pronounced for firms that are central within the director network, have a greater proportion of directors with environmental backgrounds, or are located in regions with stronger legal environments. Further, this effect is predominantly observed within independent director networks, where independent directors play a crucial role through active board participation. Our study contributes to the literature on the determinants of green innovation and offers valuable insights for policymakers seeking to improve environmental governance and promote sustainable development.