How to Keep Investors’ Confidence after Being Labeled as Polluting Firms: The Role of External Political Ties and Internal Green Innovation Capabilities

Abstract

This study delves into investors’ perceptions of the polluting label attached to listed manufacturing firms, emphasizing the interplay between external political ties and internal green innovative capability in influencing these perceptions. Drawing on a longitudinal analysis of listed manufacturing firms in China from 2010 to 2020 and employing a difference-in-differences (DID) approach, we treat firms identified under the National Specially Monitored (NSM) program as the treated group, while non-NSM firms form the control group. The time variable captures the period post the introduction of the NSM program. Our findings highlight that the polluting label created a loss prospect for investors, signifying diminishing returns over time. Interestingly, firms with closer connections to local governments experienced amplified negative investor perceptions. In contrast, strong affiliations with the central government and robust green innovative capabilities cushioned these adverse reactions. Notably, central ties proved even more beneficial when complemented by green innovative capability. By melding signal theory with the literature on sense-making, this research adds nuance to the discourse on the role of resources in determining firm success amidst environmental controversies.