The product‐market performance benefits of environmental policy: Why customer awareness and firm innovativeness matter

Abstract

Researchers have widely studied the nexus between corporate environmental ('green') policy and its green performance and firm financial performance, but with mixed findings. A potential explanation for these mixed findings is the focus of extant studies on the direct and immediate impact of environmental performance on financial performance to the exclusion of firm-specific boundary conditions. Furthermore, all prior research study the effect of environmental performance on either stock market-based performance measures (i.e. stock return) or accounting-based performance measures (i.e. ROA). A missing third dimension of firm performance, product-market-based performance (i.e. market share) has so far remained unexplored despite representing a crucial objective when innovating. Using Newsweek's annual green ranking as a novel measure of environmental performance for a panel of U.S. firms from 2010 to 2015, this paper attempts to fill these voids in the literature. The results show a positive relationship between firms' environmental performance and market share as a measure of product-market-based performance. The findings further demonstrate that this relationship is positively moderated by the level of customer awareness and innovativeness of the firm: the higher the level of awareness of a firm's environmental credentials and innovativeness, the stronger the effects of environmental performance on market share. Our results are robust against endogeneity concerns and alternative measures of firm financial and environmental performance.

How do firms achieve sustainability through green innovation under external pressures of environmental regulation and market turbulence?

“…On one hand, consumers are becoming increasingly concerned with the health benefits and energy savings of the products that they buy and use. On the other hand, consumers are paying much more attention to the quality of the environments in which they live (Rahman et al, 2020).…”

“…Therefore, evolutionary theory predicts that among responses to environmental regulation and market turbulence, firm investment in innovation may play a critical role (Nelson & Winter, 2002). Either processes of production or final products must be adapted so that firms can invest more in technological improvements to the production process or in the design and production of new products (Rahman, Aziz, & Hughes, 2020; Tang et al, 2018; Zhou et al, 2019). Regardless, the ultimate goal is to adapt to external pressures through innovation and to achieve long‐term sustainable development (De Clercq et al, 2018).…”

“…On one hand, consumers are becoming increasingly concerned with the health benefits and energy savings of the products that they buy and use. On the other hand, consumers are paying much more attention to the quality of the environments in which they live (Rahman et al, 2020). Thus, whether a product is green has gradually become one of the most important considerations for customers when they purchase (Wu, Wu, Lee, & Lee, 2015).…”

Business strategy and sustainable development: Evidence from China

“…As consumers' awareness of environmental protection increases, customer pressure significantly affects firms' green innovation activities (Weng & Lin, 2011). Green innovation performance plays an active role in green images (Chen, 2008) and corporate reputation (Gangi, Daniele, & Varrone, 2020), which is positively associated with customer satisfaction and customer loyalty (Chang & Fong, 2010), and even market share (Rahman, Aziz, & Hughes, 2020). Therefore, prospectors are more likely to undertake green innovation than defenders.…”

Banks' environmental policy and business outcomes: The role of competition

“…They showed that environmental performance influences company profitability, environmental disclosure does not affect profitability, and environmental performance moderated by environmental disclosure influences profitability. By application of Newsweek's annual green ranking, Rahman, Aziz, and Hughes (2020) tried to fill a gap in the literature on the effect of environmental performance on financial performance. Their results showed a positive relationship between firms' environmental performance and market share as a measure of product–market‐based performance.…”