International evidence on investor rewards to firms generating environmental innovation

Abstract Using firm patents across 38 countries, we explore whether, and if so, how investors value environmental innovations (EIs). We integrate the natural-resource-based view and innovation literature not only to predict a nonlinear link between EI and market valuation but also to hypothesize that firms with stronger absorptive capacity (AC) and those with higher stakeholder influence capacity (SIC) stand to benefit the most from EI. We provide evidence in support of these predictions. Our main analysis reveals a nonlinear valuation effect of EI, but the marginal effect is positive only for firms in the top 11% of EI distribution. However, the shape of the relation varies with firm characteristics, across jurisdictions, and over time. Investors discount EI in lower AC firms, while the shares of higher AC firms trade at a premium. The differential median valuation between higher and lower SIC firms is €564.2 million. Finally, the median European firm trades at a premium, but its North American and Japanese peers trade at a discount. Our results bear implications for the modest propensity of firms to generate EI and for the observed large cross-regional variations in EI.