Artificial Intelligence Innovation, Firm Performance, and Market Perception: Does Sustainability Matter?

ABSTRACT This study analyzes how artificial intelligence (AI) innovation affects firms' financial performance and value among S&P 500 companies in the US market, using a panel data regression model for the period 2000–2024. The study finds mixed evidence of a small positive impact of AI innovation on firms' return on assets, with the effect stronger for more R&D‐intensive firms. This study also tests whether the market considers the environmental impact of AI innovation when valuing a firm's AI innovation. The findings demonstrate that AI innovation increases firm value for companies that perform well on sustainability‐related metrics. This effect is stronger under Democratic administrations than under Republican governments, indicating the influence of political environments on the market's perception of firms' actions. The results remain robust to multiple checks, including system‐GMM and PSM. The study makes a compelling argument for incorporating sustainability as a crucial strategic component in the new AI‐driven business world, while providing insights for policymakers, executives, and investors.