Environment-specific political risk mitigation: Political lobbying versus green innovation

Abstract

Greater political pressure to improve corporate environmental performance and mitigate climate change impact leads firms to operate under greater political risk and uncertainty, affecting productivity and firm value. Using a panel of 3255 US firms from 2002 to 2020, this research tests the effectiveness of two environment-specific political risk (EPR) mitigation approaches: political lobbying and green innovation. The results suggest that while both approaches mitigate EPR of the current year, only green innovation reduces future EPR. By mitigating EPR, green innovation increases firm value to a greater degree than political lobbying. This study also shows that political lobbying has a larger effect on EPR mitigation for the leaders than the laggards in green innovation. The results are robust to alternative specifications of green innovation, political lobbying and potential endogeneity concerns. Overall, this study supports the value-enhancing role of green innovation as an effective political risk mitigation strategy.