Environmental Fines and Corporate Sustainability: The Moderating Role of Governance, Firm Size, and Institutional Ownership

Environmental fines compel corporations to strengthen compliance, adopt sustainable practices, and integrate eco-innovation. This enhances legitimacy, reduces risks, and supports long-term sustainable performance across industries. Despite this importance, its effect on corporate sustainability performance (CSP) and the moderating roles of corporate governance quality, firm size, and institutional ownership remain underexplored, creating significant knowledge gaps. This study applied stakeholder and institutional theory to address these gaps, using data from 187 non-financial firms listed on the Frankfurt Stock Exchange between 2006 and 2024, obtained from Thomson Reuters Eikon DataStream. Three advanced estimation models—augmented mean group (AMG), common correlated effects mean group (CCEMG), and generalized method of moments (GMM)—were employed. Findings indicate that environmental fines have a positive and significant effect on CSP. Moreover, the moderating effects of governance quality, firm size, and institutional ownership also positively and significantly influence CSP. Strong governance enables firms to transform fines into strategic opportunities, driving sustainability investments, improving risk management, and fostering accountability that aligns operations with regulatory and stakeholder expectations.