Sailing From Penalties to Accountability: Business Strategies and Governance for Firms to Innovate After Environmental Misconduct

ABSTRACT Firms' continuous pursuit of making a profit in the competitive market may ignore the actions related to environmental responsibilities. This set of actions for financial gains constitutes environmental misconduct, which not only harms ecosystems and communities but also brings reputational damage. Negative press and social media amplification damage brand legitimacy, erode stakeholder trust and deter investors. Although prior research has examined greenwashing, little attention has been given to how firms strategically respond once misconduct becomes visible. We propose that firms respond to environmental misconduct by increasing R&D spending as a corrective strategy to repair reputational damage. Using a longitudinal dataset of 117,112 firm‐quarter observations that merges Violation Tracker with Compustat and ExecuComp for the years 2000–2025, we analyse how environmental misconduct influences firms' R&D spending. Employing high‐dimensional fixed‐effects models and the Gaussian copula approach to address endogeneity, we find that firms tend to increase R&D investment following misconduct. The decision to increase R&D spending signals a commitment to sustainability and helps rebuild stakeholder confidence. We further explore the moderating role of firm resources and industry structure. Our results show that firms with abundant organisational slack, financial and operational efficiency, or market power face less pressure to increase R&D spending.