(PDF) Institutional investors and corporate green innovation: Evidence from China

ORIGINAL ARTICLE

Institutional investors and corporate green

innovation: Evidence from China

Zhen Yang

1

| Dongwei Su

2

| Shulin Xu

3

| Xu Han

4

1

School of Business Administration,

Dongbei University of Finance and

Economics, Dalian, China

2

School of Economics, Jinan University,

Guangzhou, China

3

School of Cultural Tourism and

Geography, Guangdong University of

Finance & Economics, Guangzhou,

China

4

Finance Department, CITIC

AGRICULTURAL CO., LTD., Beijing,

China

Correspondence

Shulin Xu, School of Cultural Tourism

and Geography, Guangdong University of

Finance & Economics, Guangzhou,

China.

Email: linsxjn@163.com

Funding information

Jinan University Research Funds,

Grant/Award Number: 19JNLH05;

National Natural Science Foundation of

China, Grant/Award Number: 71972087

Abstract

Using data for manufacturing firms listed on China

A-share markets between 2003 and 2018, this research

explores the impact of institutional investors on corpo-

rate green innovation. The study finds that pressure-

resistant institutional investors (PR investors) positively

contribute to green innovation, whereas pressure-

sensitive institutional investors (PS investors) hinder

it. In addition, this study examines the moderating

effect of political ties, distinguishing between ascribed

and achieved ties. Ascribed ties weaken the positive

relationship between PR investors and green innova-

tion, whereas achieved ties strengthen it and weaken

the negative association between PS investors and

green innovation. Moreover, the study investigates the

influence of institutional development on the relation-

ship between institutional investors and green innova-

tion, and finds that managerial myopia is the

mechanism through which institutional investors influ-

ence green innovation. Furthermore, this study reveals

that there are heterogeneity effects among small and

large firms, polluting and non-polluting firms, and

firms facing different levels of market competition.

Overall, the study sheds new light on how institutional

investors, acting as ‘invisible hands’, interact with

political ties, acting as ‘visible hands’, to impact green

innovation in transition economies.

Received: 14 April 2022 Revised: 8 May 2023 Accepted: 13 October 2023

DOI: 10.1111/1468-0106.12440

1|INTRODUCTION

Environmental challenges have become a significant hurdle to achieving economic and social

sustainability in most transition economies, including China and India. Climate change and

environmental externalities pose a threat to sustainable growth, making green innovation a cru-

cial aspect of environmental sustainability. It is widely acknowledged that adopting green inno-

vation can alter the economic structure and accelerate the construction of a new sustainable

growth pattern. With global resources becoming scarce and environmental degradation worsen-

ing, creative green concepts and sustainability are gaining popularity in the capital market,

drawing the attention of an increasing number of investors. As the largest developing country

globally, China has achieved remarkable economic development over the past 40 years, primar-

ily due to its reform and opening-up policies. Nevertheless, the Chinese government recognizes

the significance of high-quality development and promotes green innovation as a viable option

for businesses that face trade-offs between economic growth and environmental conservation.

Green innovation refers to the process, technology, or management model that reduces

energy consumption, minimizes environmental degradation, and enhances a firm's corporate

social responsibility (CSR) performance, leading to sustainable development (Aghion

et al., 2016; Jiang & Bai, 2022). In particular, Aghion et al. (2016) distinguish between ‘dirty’

technologies and environmentally friendly technologies, concluding that firms that have previ-

ously innovated in dirty technologies are more likely to continue to invest in them in the future

because of path dependence. Many scholars have shown a strong interest in understanding the

foundations of green innovation, and there is a vast literature that discusses the reasons behind

its rise from various perspectives. At the macro-level, explanations have been offered, including

economic complexity (Mealy & Teytelboym, 2020), market competition (Duanmu et al., 2018),

international expansion (Kim et al., 2021), carbon taxes (Aghion et al., 2016), green bonds

(Flammer, 2021), environmental certification (He & Shen, 2019), and subsidy policy (Xiang

et al., 2021). At the micro-level, explanations include financial constraints (Huang &

Chen, 2022), CEO/top management team personalities (Ren et al., 2021), and absorptive capac-

ity in environmental capabilities (Dzhengiz & Niesten, 2020; Yan et al., 2021).

In recent years, market forces have played a more significant role in promoting corporate

environmental protection and social responsibility behaviour compared to environmental regu-

lation and subsidies. Market actors, such as equity market transactions (Amore &

Bennedsen, 2016), green bonds (Flammer, 2021), and green credit (Wen et al., 2021), have a

substantial impact on corporate environmental management. With China's financial reform,

the role of market forces in promoting corporate innovation, fulfilling social responsibilities,

and information disclosure has become increasingly significant (Ren et al., 2022). The Chinese

government has promoted institutional investor involvement in capital markets since 2003. In

addition, the split-share structure reform since 2005 has attracted many market actors, such as

institutional investors, to participate in corporate governance and the executive decision-

making process (Liao et al., 2014). Thus, studying the effects of institutional investors on green

innovation and how they interact with the government's role and institutional development

environment have become more and more important.

Using data on Chinese manufacturing firms listed in China A-share markets from 2003 to

2018, this paper investigates the effects of different types of institutional investors on corporate

green innovation and makes several contributions to the existing literature. Firstly, we contrib-

ute to the growing literature on external drivers of corporate green innovation by considering

the claims and demands arising from primary and secondary stakeholders. Whereas previous

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studies have mostly examined how organizations are affected by external pressures, and how

they manage these pressures to avoid endangering the survival of the organization, our study

demonstrates that the engagement of primary and secondary stakeholders can be a better pre-

dictor of firms' green innovation. In particular, we argue that different types of institutional

investors may have varying effects on green innovation, depending on the nature of their

involvement in corporate governance. We argue that firms with more pressure-resistant inves-

tors (PR investors) direct their attention to secondary stakeholders' concerns (e.g., local commu-

nities' interests for sustainability), thus PR investors can positively affect green innovation. In

contrast, firms with more pressure-sensitive investors (PS investors) direct their attention to pri-

mary stakeholders' concerns (e.g., acting as shareholders), and thus PS investors negatively

affect green innovation.

Secondly, our study extends recent work on stakeholder management by highlighting the

alignment between market actors and political actors as an important antecedent of corporate

green innovation. Specifically, we find that achieved political ties strengthen the positive associ-

ation between PR investors and green innovation and weaken the negative association between

PS investors and green innovation. Moreover, the institutional environment may produce man-

datory and normative isomorphic pressures on green innovation, which in turn strengthens the

positive influence of PR investors on green innovation and weakens the negative influence of

PS investors on green innovation. Thus, our study reveals the complementarity between govern-

ment and market actors (i.e., institutional investors) in influencing firm incentives to engage in

green innovation.

Thirdly, our study examines the mediating role of managerial myopia in determining the

relationship between institutional investors and corporate green innovation, and how the influ-

ence of institutional investors on corporate green innovation is contingent on firm size and

industry. The implications of our findings may enable us to evaluate the effect of institutional

investors more objectively.

The remainder of this paper is organized into five sections. Section 2provides a review of

the literature and develops hypotheses. Section 3describes the data sources and model specifi-

cations. Section 4presents the empirical results and robustness checks. Section 5discusses fur-

ther analyses. Finally, Section 6concludes the study and presents policy implications.

2|LITERATURE REVIEW AND HYPOTHESIS

DEVELOPMENT

2.1 |Institutional investor and firm behaviour

The relationship between institutional investors and firm behaviours has been widely discussed

in finance literature. This line of inquiry finds associations between institutional ownership and

a host of strategic decisions, including R&D investment (David et al., 2008), competitive tactics

(Connelly et al., 2010), and corporate fraud (Wu et al., 2014). One stream of research has dis-

cussed how institutional ownership facilitates the adoption of effective governance practices

(i.e., monitoring mechanism; David et al., 1998; Jiang & Yuan, 2018; Jiang & Bai, 2022).

Although executives shape and direct their organizations' decisions, their authority is not abso-

lute. Significant shareholders, such as institutional investors, frequently challenge or oppose

senior management. For example, institutional investors are often large, skilled investors who

monitor and help improve the integrity of financial reporting (Ramalingegowda et al., 2021).

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According to stakeholder theory, as institutional ownership grows, these owners will gain

greater power and influence over senior managers' decisions. Given that executives typically

pay more attention to those on whom their outcomes depend, they are more likely to pay atten-

tion to institutional investors who hold significant stakes in their companies. Although these

investors may not communicate directly with managers, as long as managers are aware of

investors' preferences, they should consider those preferences when making decisions if those

investors have significant power, and the stakeholder group's salience is likely to increase

(Neubaum & Zahra, 2016). Meanwhile, due to monitoring, institutional investors can discover

and reward managerial skills in capital markets, and corporate social performance is one area

in which prominent institutional owners may exert a significant amount of influence over

executives.

Another stream of literature examines how institutional ownership influences strategic deci-

sions (i.e., influencing mechanism) by supplying specific resources (Luong et al., 2017;

Schain & Stiebale, 2020). Resource dependence theory argues that organizations manage their

interactions with external contexts to reduce uncertainty, and external environments provide

support and resources. Institutional investors can supply critical financial resources and valu-

able information to firms (Ramalingegowda et al., 2021), but they can also increase firms'

dependence directly and indirectly. For instance, Schain and Stiebale (2020) revealed that insti-

tutional investors alleviate firms' financial constraints and stimulate innovation. Peer firms

competing for institutional ownership have more incentives to acquire capital (Lin et al., 2018).

Government Guiding Funds (GGFs)—a type of investor established by governments, which col-

laborates with private venture capital to invest in state-selected priority sectors—have expanded

capital access for tech start-ups in China. Therefore, institutional investors can influence firm

decisions, including strategic investments (David et al., 2006), corporate political activities (Shi

et al., 2021), and investment horizon (Li & Lu, 2015).

In addition, different types of institutional investors may have varying influences on firm

behaviours (Kochhar & David, 1996). PR investors, such as insurance and securities firms, typi-

cally have short-term business relationships with the companies they invest in (Chen

et al., 2015). They tend to avoid encouraging change that may create conflicts of interest with

company managers and often align themselves with managers who support their decisions,

resulting in a passive monitoring role. Conversely, PS investors, such as private placements and

funds, have a greater degree of independence since they only have investment contracts and no

business ties with the companies they invest in. Therefore, they are less susceptible to pressure

from management and more likely to raise objections to short-sighted behaviours when neces-

sary (Jiang & Bai, 2022). These investors aim to guide companies in the market and are more

focused on the long-term value of the company and its ethical standards (Xiong et al., 2022).

2.2 |Investigating coporate green innovation from the perspective of

stakeholder theory

Stakeholders are groups or individuals who can significantly impact (or be impacted by) the

strategic outcomes of a company. Stakeholder engagement reflects firms' actions to address

stakeholders' interests and thus achieve shared objectives and values (Freeman, 1984). Indeed,

sustainable development of firms arises from their capacity to manage stakeholders' expecta-

tions in pursuit of corporate growth, stability, and profitability (Freeman et al., 2008). Existing

research has investigated a variety of antecedents of firms' stakeholder engagement. For

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instance, stakeholder engagement has been associated with resource availability (Kolk &

Pinkse, 2007), political ideology of the executives (Chin et al., 2013), and CEO's regulatory focus

(Chiu et al., 2023). In particular, research on stakeholder management has identified the grow-

ing stakeholder logic, which advocates expanded engagement of stakeholders, and not just

shareholders, as part of the strategic orientation of the firm (Hillman & Keim, 2001). From a

normative stakeholder perspective, diversified stakeholders have inherent moral worth or

value—in other words, conflicting stakeholder interests (Chiu et al., 2023). The existence of

these conditions suggests that top managers may have to balance the interests of different stake-

holder groups, leading to different priorities. Therefore, it is crucial to examine the needs of dif-

ferent stakeholder categories to understand the potential trade-offs that arise.

Scholars have focused on understanding the distinct interests of primary and secondary

stakeholders, as classified by Freeman et al. (2008), in their studies (e.g., Chiu et al., 2023;Su&

Tsang, 2015). Primary stakeholder engagement refers to the degree to which a company serves

its shareholders and employees, who are directly related to the survival of the firm and are

likely to make specific requests for the financial performance of the company (Mitchell

et al., 1997). In contrast, secondary stakeholder engagement pertains to how well a company

serves the diverse interests of stakeholders who are indirectly impacted by the firm, such as

local communities (Godfrey et al., 2009; Su & Tsang, 2015). Although secondary stakeholders

may lack the power to enforce their claims on firms, they can contribute to long-term benefits,

such as reputation and legitimacy, through initiatives like charitable giving, volunteer

programmes, and green innovation (Brower & Dacin, 2020; Chiu & Sharfman, 2011). The cru-

cial question is what motivates a company's engagement with specific stakeholders (primary or

secondary), given that executives face limited resources and bounded rationality while juggling

the often incompatible interests and demands of all legitimate stakeholders.

2.3 |Investigating corporate green innovation from the perspective of

multi-stakeholders

Organizations face numerous external constraints and uncertainties that can threaten their sur-

vival, leading them to take action to address these challenges (DiMaggio & Powell, 1983;

Meyer & Rowan, 1977). In addition, firms can enhance their competitiveness by conforming to

institutional norms recognized as legitimate (Suchman, 1995). Institutional theory distinguishes

three types of pressure: coercive, normative, and mimetic (DiMaggio & Powell, 1983), which

create isomorphism in organizational strategies, structures, and processes. For instance, Chen

et al. (2012) found that coercive pressure from government regulations can drive firms to adopt

environmental innovation. Firms engaged in outward foreign direct investment tend to invest

more in green technologies and appeal to the ecological demands of host countries to address

sophisticated customers' concerns. Similarly, Soundararajan et al. (2021) argued that normative

pressures from competitors can push firms to participate in green supply chain practices. There-

fore, many studies based on institutional theory have explored how specific actors' pressures or

constraints—such as coercive pressure from governments or politicians, normative pressure

from customers or competitors—can influence firms' adoption of green initiatives (Chen

et al., 2018; He & Shen, 2019; Huang & Chen, 2022).

We argue that economic and political actors may not work independently to influence firm

decisions, especially in transition economies such as China. Li, Xia, and Zajac (2018) proposed

a multi-stakeholder framework that considers the determinants of firm innovation by

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simultaneously analysing the concerns of political and economic stakeholders. The multiple

sources of institutional pressure highlight the diverse resources and interests of different actors,

and their alignment can influence organizational outcomes such as green innovation.

Market stakeholders, including innovative rivals, responsible suppliers and buyers, and

responsible investors, can exert institutional pressure and influence corporate green innovation.

The demands for environmental responsibility from stakeholders can increase competition and

push firms to invest in ecological technologies to remain competitive (Dzhengiz &

Niesten, 2020; Jiang & Bai, 2022; Schillebeeckx et al., 2022). Meanwhile, governments can

encourage corporate green innovation through various means, such as regulation, financial and

tax incentives, and innovation programmes, particularly in transition economies. Government

involvement in green innovation is necessary to remedy market failure due to the significant

uncertainties in R&D projects (Huang & Chen, 2022; Krieger & Zipperer, 2022; Xiang

et al., 2021).

However, antagonistic demands between political and economic actors may have adverse

effects on corporate green innovation (Freeman et al., 2004). For instance, government

demands may not always align with market principles and may raise financing costs, stifling

green innovation (Chen, Zhu, et al., 2022). Firms affiliated with lower levels of government

may have more incentives to prioritize local employment and tax incomes rather than national-

level objectives such as technology catch-up (Li, Xia, & Zajac, 2018).

Therefore, this study investigates how institutional investors, as a typical market actor,

interact with the political ties of focal firms, via visible hands, to influence corporate green

innovation in transition economies. The multiple sources of the institutional pressure perspec-

tive highlights that stakeholders with different concerns bind diversified resources to organiza-

tions, and their alignment can affect organizational outcomes.

2.4 |Heterogenic roles of political ties

In emerging economies, the political ties of focal firms can significantly impact their green

innovation and environmental concerns, in addition to the influence of market actors such as

institutional investors. Firms with connections to governments or politicians may have easier

access to specific resources, such as favourable bank loans, preferential tax treatment, and

higher IPO premiums, which can facilitate green innovation (Colombo, 2021; Faccio, 2006;

Haveman et al., 2017; Wang & Wu, 2020). However, research has also shown that political ties

can hinder corporate green innovation due to pressure extraction and inefficacy resulting from

the misuse of political capital (Hou et al., 2017; Lin et al., 2014; Naughton, 2017). To reconcile

the seemingly contradictory roles of political ties, we distinguish between two types of political

ties according to Zhang et al. (2016): ascribed and achieved political ties. These terms refer to

strikingly different types of political connections, similar to two sides of a coin (Stark, 2007).

While ascribed political ties result from a firm's inherent or inherited characteristics, achieved

political ties result from active efforts to establish relationships with government officials or

other political actors.

Ascribed political ties refer to connections that executives established as government offi-

cials before entering the business world (Hillman et al., 2004). In our case, ascribed political

connections are established when executives worked as full-time government employees or offi-

cials before becoming executives of a firm (Zhang et al., 2016). As per Hillman et al. (2004),

those who have previously worked in government possess unique knowledge about government

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bureaucracy and policy-making, and they have established trust and interpersonal loyalty with

government officials due to shared experiences and ideology. Ascribed political ties are usually

built over a long period and are an essential part of executives' careers, making this political

capital stable enough to protect firms' interests. Thus, ascribed political ties serve as a buffer

against institutional pressure, allowing firms to ignore or fend off external claims.

Achieved political connections, on the other hand, are the result of efforts and accomplish-

ments made by executives in their current roles and obligations (Zhang et al., 2016). Kristen

(2004) argued that the Chinese government rewards private company entrepreneurs with politi-

cal positions, such as serving as a delegate to the People's Congress or People's Political Consul-

tative Conference. Such political capital may facilitate firm operations in certain contexts.

Achieved political connections are usually the outcome of ongoing collaboration and exchange

of favours between businesses and the government (Nyberg, 2021). As ‘political outsiders’, busi-

ness people cultivate achieved political ties through their efforts and accomplishments, such as

when firms become large and successful. However, political ties established through such

appointments tend to be temporary, and the fear of losing such political appointments makes

firms more sensitive to institutional pressure, making them vulnerable to external claims.

We theorize that the two types of political ties differ in how and when they are accumulated

and reflect different business–government relationships. In particular, we can expect that they

have different moderating effects on the association between the influence of market actors

(e.g., institutional investors) and corporate green innovation.

2.5 |Hypothesis development

2.5.1 | Heterogenic institutional investors and coporate green innovation

As previously mentioned, institutional investors play a crucial role in promoting firms' CSR

concerns and sustainable transformation by providing resources for product and technology

updates. However, due to heterogeneity among institutional investors, we argue that the impact

of different types of investors on corporate green innovation may vary. Specifically, we distin-

guish between two types of institutional investors: pressure-resistant (PR) investors and

pressure-sensitive (PS) investors. PR investors are shareholders who have no other business

relationship with firms except for their investment, such as mutual funds, social security funds,

and qualified foreign investors. They prioritize long-term benefits and are highly motivated to

monitor management and provide necessary resources (Bushee, 1998; Jiang & Bai, 2022;

Kochhar & David, 1996). Conversely, PS investors, such as insurance and securities companies,

have a short-term business connection with their investments. They tend to align themselves

with managers who support their decisions and often take a passive role in monitoring, which

can lead to investor-friendly or strategic innovation, such as low-tech investments (Jiang &

Bai, 2022).

Although firms with more PR investors may prioritize the concerns of secondary stake-

holders, such as local communities, we contend that PR investors have a positive impact on

green innovation. Firstly, PR investors can use their shareholder influence to promote environ-

mental concerns in firms. They can leverage governance tools available to them through their

social concern, and being more sensitive to external demands for environmental sustainability,

they are more likely to commit to green innovation, given their long-term investment horizon

and willingness to accept lower immediate economic returns (García-S

anchez et al., 2020; Yan

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et al., 2021). Moreover, PR investors enjoy a degree of independence since they are involved

only in investment contracts and have no commercial relationships with firms (Kochhar &

David, 1996). This independence means they are less susceptible to management pressure and

more likely to voice concerns about managers’short-sighted behaviour. Given their image

and reputation concerns, PR investors can become more involved in social and environmental

management by offering advice on how to promote a firm's long-term value and code of behav-

iour directly to the management team. This engagement plays a crucial monitoring role in man-

agement decision-making (Jiang & Yuan, 2018). PR investors often have the necessary voting

rights to constrain firms’unethical behaviour, promote green technological innovation, and

inhibit managers from slacking off on green innovation due to risk aversion (Jiang & Bai, 2022).

In addition, PR investors can also play a direct role in shaping corporate environmental

investment decisions through their participation in ESG as stakeholders. By leveraging their

financial influence, these investors can promote companies to implement green investment to

meet social requirements. One way that responsible investors can achieve this is by ‘voting with

their feet’and other signalling behaviours, which act as reputation mechanisms to encourage

better CSR performance and push enterprises into green innovation. Long-term-oriented finan-

cial investors like mutual funds and social security funds are particularly likely to pursue CSR

performance and support green innovation initiatives (Jiang & Bai, 2022).

Moreover, PR investors may reward corporations for better green innovation performance

by establishing socially responsible investment funds or by offering incentives like premium

pricing, preferential advisory services, capital infusions, higher rankings, or other forms of repu-

tational capital. Studies suggest that such reward-based strategies can be effective in motivating

managers to respond positively to investor demands (Hawn et al., 2018; Mackey et al., 2020).

Conversely, investors may also use punishment strategies to discourage poor GI performance,

such as through shareholder resolutions, boycotts, bad publicity, mass dumping of shares, or

other forms of activism aimed at driving down profits or stock prices of companies that fail to

meet ESG standards. Therefore, we propose the following hypothesis:

Hypothesis 1a. PR investors have a positive impact on corporate green innovation.

Although firms with more PR investors may prioritize primary stakeholders' concerns

(e.g., acting as shareholders), we argue that PS investors can have a negative effect on green

innovation. PS investors are shareholders who have both investment and business relations

with enterprises, such as banks, insurance institutions, securities traders, and other institutional

investors (Kochhar & David, 1996). They are transient shareholders who are close to managers

and may vote in favour of management decisions to maintain their business links and build alli-

ances with controlling shareholders (Brickley et al., 1988 Aggarwal et al., 2015; Firth et al.,

2010; Firth et al., 2016).

Moreover, PS investors are short-term-oriented financial investors who prioritize internal

demands such as financial performance and debt pay-offs, which demand immediate economic

returns (Chen et al., 2015; García-Meca & Pucheta-Martínez, 2018; García-S

anchez et al., 2020).

This short-term focus may inhibit their willingness to invest in CSR or sustainability practices

(Oh et al., 2011). Additionally, firms that have invested heavily in ‘dirty’technologies in the

past may find it easier and more profitable to continue investing in them, due to path depen-

dence, rather than transitioning to more sustainable practices (Aghion et al., 2016). This focus

on short-term profits may lead to a preference for cost-cutting measures over investing in

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sustainable practices, such as environmental-friendly technologies, inhibiting firm innovation

and adoption of proactive environmental strategies (Kochhar & David, 1996).

Overall, we argue that PS investors have a negative impact on green innovation as a result

of their short-term focus on immediate economic returns, lack of commitment to sustainability

practices, and prioritization of business links over responsible investment practices. Therefore,

we propose the following hypothesis:

Hypothesis 1b. PS investors have a negative impact on corporate green

innovation.

2.5.2 | Moderating effect of ascribed political ties

Given the heterogeneity of political ties and their accumulation processes, we anticipate varying

moderating effects on the relationship between institutional investors and corporate green inno-

vation. Ascribed political ties, as a form of social capital, have a ‘detaching effect’that enables

firms to distance themselves and protect their interests from institutional pressure. Firstly, these

ties are established during executives' earlier careers as full-time government employees or offi-

cials, which can later provide firms with specific resources and leverage that can buffer them

from external demands. For example, politically connected firms may receive benefits from the

government, such as bank loans granted at favourable terms, making them less responsive to

the demands of institutional investors (Wu et al., 2014). Secondly, social networks resulting

from ascribed political ties can provide communication channels or access to existing bureau-

crats. This communication access can provide diversified financing channels and protect firms

from excess imposition and potential sanctions if they are not willing to invest in green innova-

tion at excessive costs under the pressure of PR investors. Thirdly, executives' experience and

skills developed as prior officials can help them negotiate with their shareholders

(e.g., institutional investors) more effectively, or even persuade or offend their stakeholders if

they are unwilling or unable to invest in GI. Ascribed political ties, therefore, act as a buffer

against institutional pressure, allowing firms to ignore or even fend off external demands from

PR institutional investors. Therefore, we propose the following hypothesis:

Hypothesis 2a. The positive relationship between PR investors' ownership and cor-

porate green innovation is weaker for firms with more ascribed political ties.

We also expect that the relationship between PS investors' ownership and green innovation

will be weaker for firms with more ascribed political ties, as these ties create a ‘detaching effect’

that allows firms to protect their interests from institutional pressure. Politically connected

firms may have greater access to resources such as government grants, subsidies, or contracts

that could help them overcome the potential negative effects of PS investors' short-term focus

on their green innovation. Additionally, as PS investors may prioritize financial performance

and debt pay-offs, politically connected firms may leverage their ties to shape government poli-

cies and regulations in ways that are more conducive to green innovation (Kochhar &

David, 1996). Thus, we expect that ascribed political ties can mitigate the potential disadvan-

tages of PS investors' ownership in corporate green innovation decisions. Based on the above

discussion, we propose the following hypothesis:

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Hypothesis 2b. The negative relationship between PS investors' ownership and

corporate green innovation is weaker for firms with more ascribed political ties.

2.5.3 | Moderating effect of achieved political ties

Achieved political ties are established through firm executives' efforts to meet government

expectations, creating a strong bond between firms and the government. By conforming to or

actively aligning with government expectations, entrepreneurs can enhance their political capi-

tal while safeguarding the interests of their companies. Achieved political connections are more

likely to bind firms to social demands for sustainability and thus facilitate green innovation.

We predict that firms with achieved political ties are more likely to cope with institutional

pressure and invest more in green innovation. Achieved political ties reflect continuous or

anticipated relationships between entrepreneurs and their firms with the government, in which

the government grants political recognition, social status, and prestige to entrepreneurs. Conse-

quently, firms are likely to engage actively in social contributions, such as investing in green

innovation even at high costs. Entrepreneurs with achieved political connections may have a

better understanding and access to information about government concerns, as well as higher

awareness of CSR and technological advancements (Jia et al., 2019; Marquis & Qiao, 2020). As

a result, they are more likely to take actions from the perspective of local governments and be

committed to promoting green innovation with the help of PR investors. Therefore, we propose

the following hypothesis:

Hypothesis 2c. The positive relationship between PR investors' ownership and cor-

porate green innovation is stronger for firms with more achieved political ties.

Additionally, achieved political connections place firms under higher expectations from the

public, leading them to take more initiative in sustainability even in the absence of external

supervision, such as from firms with more PS investors. According to the Confucian social

model of role transition, successful entrepreneurs are more likely to shift from self-orientation

to society-orientation after achieving economic success, and this can motivate them to pursue

prosocial concerns after achieving political status (Li & Liang, 2015). Thus, firms with achieved

political connections may be more committed to investing in green innovation with the help of

PR investors. Moreover, the fear of losing political appointments can also bind firms to govern-

ment demands for sustainable development, as political status is vulnerable to competition from

entrepreneurs without political connections who desire such positions. This, in turn, makes

firms more vulnerable to external claims and institutional pressure. Hence, these types of politi-

cal ties can help firms overcome the disadvantages of PS investors' ownership in green innova-

tion decisions. Therefore, we propose the following hypothesis:

Hypothesis 2d. The negative relationship between PS investors' ownership and

corporate green innovation is weaker for firms with more achieved political ties.

2.5.4 | Moderating role of institutional development

Indeed, there is considerable variation in institutional environments across countries, and the

pace of institutional transition can also differ. In some cases, there may even be setbacks where

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market-oriented institutions deteriorate over time, as pointed out by Banalieva et al. (2018). The

institutional environment can generate both mandatory and normative isomorphic pressures

on green innovation, with better institutional environments providing a more conducive con-

text for PR investors to promote firms' environmental concerns. Institutional development can

also reduce information asymmetry between firms and external stakeholders, thereby facilitat-

ing CSR disclosure (Ren et al., 2022; Wu et al., 2022). This, in turn, can enhance the ability of

PR institutional investors to effectively supervise and participate in strategic decision-making

(Jiang & Bai, 2022). Therefore, we propose the following hypothesis:

Hypothesis 3a. The positive relationship between PR investors' ownership and cor-

porate green innovation is more pronounced for firms headquartered in regions

with higher levels of institutional development.

Furthermore, we expect that firms headquartered in regions with higher levels of institu-

tional development will exhibit a weaker relationship between PS investors' ownership and

GI. This is because a good institutional environment reduces investment risk for PS investors

and influences firms' commitment to innovation (Wang, 2018). Firms located in areas with an

excellent institutional environment are more sensitive to mandatory and normative isomor-

phism, which makes PS investors pay attention to their ESG performance. For example, Li and

Wang (2022) found that CSR engagement is positively influenced by the CSR engagement of

other firms headquartered nearby, indicating the presence of local peer effects in CSR. On the

other hand, when the pace of institutional development is fast, it signals to market actors that

transaction costs will be reduced in the future (Banalieva et al., 2018). This, in turn, creates a

more favourable environment for firms and PS investors to use market-oriented practices to

achieve high investment payoffs through green innovation. Firms with better green innovation

performance are particularly adept at utilizing these market-oriented practices and resources,

giving them a heightened sense of control over their ability to obtain short- and long-term

investment payoffs. As a result, in an excellent institutional environment, PS investors are more

motivated to monitor and assist firms in committing to green innovation. Therefore, we propose

the following hypothesis:

Firm-level moderators

Pressure-resistant (PR)

institutional investor

H1a

Pressure-sensitive (PS)

institutional investor

Green

innovation

Ascribed political ties Achieved political ties

Regional-level moderator

Institutional development

H1b

H2a

H2b

H2c

H2d

H3a H3b

FIGURE 1 Conceptual framework.

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Hypothesis 3b. The negative relationship between PS investors' ownership and

corporate green innovation is weaker for firms headquartered in regions with higher

levels of institutional development.

Figure 1depicts the conceptual framework of all hypotheses developed in this section.

3|RESEARCH DESIGN

3.1 |Sample

This study uses a unique panel dataset of Chinese manufacturing firms listed in the A-shares of

the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE) from 2003 to

2018. Manufacturing firms were chosen because they are assumed to be more dynamic and com-

pete through new products and services than other sectors. The sample begins in 2003 because

the Chinese government promoted institutional investors' involvement in capital markets since

that year, especially by approving the entry of qualified foreign institutional investors (QFIIs)

into the Chinese securities market. To capture the time lag of patent application and final autho-

rization, which takes around 3–5 years of patent examination (Liegsalz & Wagner, 2013), the

sample was extended to 2018. Following previous studies (Wang et al., 2021), companies with

incomplete data or incur more than 2 years of operating losses (i.e, special treatment or ST and

ST* companies) were excluded. The final sample consisted of 2565 companies and 22,173 firm-

year observations between 2003 and 2018. Data on patents were manually collected from the State

Intellectual Property Office (SIPO) database, while other data were obtained from the China

Stock Market & Accounting Research Database CSMAR and Chinese Research Data Services

Platform CNRDS (Piperopoulos et al., 2018; Ren et al., 2021; Ren et al., 2022;Wangetal.,2020).

3.2 |Variables

3.2.1 | Dependent variable

Green innovation (GI):GI is measured using the total number of green inventions applied for

and eventually granted by a firm in a given year. Green innovation includes processes, technolo-

gies, or products that aim to reduce energy consumption and environmental pollution and

improve environmental performance. To identify green patents, we manually searched for them

using patent classification codes (IPC codes) with reference to the IPC Green Inventory issued

by the World Intellectual Property Organization, following prior studies (Aghion et al., 2016;

Huang & Chen, 2022; Ren et al., 2021; Ren et al., 2022). According to the State Intellectual Prop-

erty Office in China, there are three types of patents: invention, utility, and design. Inventions

are more original and require stricter examination than utility and design patents, which better

reflect firms' achievements in environmental protection and green technology development.

3.2.2 | Independent variables

PR investors: Consistent with previous research (Brickley et al., 1988; Jiang & Bai, 2022;

Kochhar & David, 1996; Westphal & Bednar, 2008; Firth et al., 2010; Firth et al., 2016),

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institutional investors who are resistant to pressure (PR investors) typically do not have any

direct business relationship with firms, and thus can potentially act as effective monitors of cor-

porate governance and strategic decision-making. Examples of PR investors include social secu-

rity funds, securities investment funds, and QFIIs. To measure the ownership of PR investors,

we calculated the total proportion of shares held by these investors who own at least 1% of a

firm's equity.

PS investors: As previous studies have suggested, pressure-sensitive institutional investors

(PS investors) have a higher likelihood of being influenced by the firms they invest in, due to

ongoing or anticipated business relationships and have less ability to interfere in corporate deci-

sions (Brickley et al., 1988; Jiang & Bai, 2022; Kochhar & David, 1996; Westphal &

Bednar, 2008; Firth et al., 2010; Firth et al., 2016). Examples of these institutional investors

include insurance funds, securities companies, trust companies, banks, and financial companies

that have an association with companies. To calculate the PS investors' ownership, we summed

up the percentage of shares held by these PS investors, which owned at least 1% of a firm's

equity.

3.2.3 | Moderating variables

Ascribed political tie: This is measured by whether the board chair or CEO had prior govern-

ment work experience (e.g., former official) before assuming their position (Zhang et al., 2016).

Ascribed political connections refer to the social capital that executives have created as govern-

ment officials before they entered the business world, and this measure is commonly used in

the literature to capture the executives' personal connections or established political capital

(Hillman et al., 2004; Sun et al., 2016; Zhang et al., 2016).

Achieved political tie: This is measured by whether the firm's board chair or CEO was serv-

ing as a delegate to the People's Congress (PC) or Chinese People's Political Consultative Con-

ference (CPPCC) (Zhang et al., 2016). Achieved political connections confer elite status to

Chinese entrepreneurs, which can prompt firms to actively respond to CSR and sustainability

development initiatives (Wang et al., 2019).

Institutional development: The National Economic Research Institute (NERI) compiles a

detailed annual index of marketization in China to specify institutional development at the pro-

vincial level. We obtained the headquarters' location of the firms from their annual reports and

used the NERI index to measure institutional development at their headquarters. The NERI

index has been widely used in different studies of finance, economics, and institutional busi-

nesses in China across diverse regions (Fan et al., 2007).

3.2.4 | Control variables

We included several control variables in our analysis. Firm size was measured by the natural

logarithm of total assets, as larger firms tend to have more resources and capabilities for

innovation and risk-taking (He & Tian, 2013). Firm age was measured by the number of

years since the firm's incorporation (Piperopoulos et al., 2018). ROA was calculated by divid-

ing the net profit by total assets. R&D intensity was measured by the ratio of R&D expendi-

ture to sales (Su, Xu, & Tong, 2023). Tobin's Q was used to control for growth opportunities

and calculated as the market value of the company divided by the replacement cost of the

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asset (Su, Xu, & Yang, 2023). State ownership was measured by the proportion of state-owned

shares to the total number of shares (Wang et al., 2012). Board size and whether the com-

pany was audited by a Big 4 accounting firm (Big4 Auditor) were also controlled for. Market

competition, measured by the sum of squares of the percentages of sales of the focal firm in

each industry based on two-digit SIC, was also included. All continuous variables were win-

sorized at the 1% and 99% levels. Table A1 in the Appendix provides the variable

measurements.

3.3 |Model specification

Given that the dependent variable is a count variable representing the number of green

inventions a firm received in a year, count models are appropriate for analysis (Blevins

et al., 2015). Poisson and negative binomial models are commonly used when dealing with

count data as the dependent variable. Descriptive statistics show that the mean value of the

dependent variable (Green innovation) differs significantly from its standard deviation (4.813

and 31.358, respectively), indicating overdispersion in the data. As a result, the negative bino-

mial regression model is more appropriate for our analysis (Piperopoulos et al., 2018). How-

ever, since the dependent variable has a significant number of zero observations (62.77% of

all observations), zero-inflated models are recommended in such situations (Blevins

et al., 2015). Therefore, we adopt the zero-inflated negative binomial (ZINB) model for our

analysis, as it has been shown to be effective in similar studies (Li, Xia, Shapiro, &

Lin, 2018; Pahnke et al., 2015). Additionally, all exploratory variables are lagged by 1 year

except for dummy variables.

TABLE 1 Descriptive statistics.

Variable Mean SD Min P25 Median P75 Max

Green innovation 4.813 31.358 0.000 0.000 0.000 2.000 1577.000

PR investors 0.041 0.081 0.000 0.000 0.011 0.042 0.703

PS investors 0.008 0.026 0.000 0.000 0.000 0.000 0.901

Ascribed political tie 0.140 0.347 0.000 0.000 0.000 0.000 1.000

Achieved political tie 0.293 0.455 0.000 0.000 0.000 1.000 1.000

Institutional development 7.238 2.203 0.230 5.610 7.396 9.300 10.39

Firm size 21.64 1.240 0.000 20.820 21.519 22.297 27.386

Firm age 16.18 5.853 2.000 12.000 16.000 20.000 64.000

Leverage 0.431 0.220 0.053 0.261 0.419 0.581 1.143

ROA 0.035 0.073 0.360 0.012 0.037 0.068 0.213

Tobin's Q 2.030 1.352 0.000 1.232 1.585 2.287 8.936

R&D intensity 0.028 0.033 0.000 0.000 0.023 0.041 0.195

State ownership 0.095 0.191 0.000 0.000 0.000 0.049 0.971

Board size 8.732 1.778 0.000 8.000 9.000 9.000 19.000

Big 4 Auditor 0.044 0.205 0.000 0.000 0.000 0.000 1.000

Market competition 0.082 0.073 0.014 0.035 0.062 0.102 1.000

Note: This table reports the summary statistics of the variables. The sample period is from 2003 to 2018 (N=22,173). See

variables definitions in Table A1. PR investors is the pressure-resistant institutional investors’ownership. PS investors is the

pressure-sensitive institutional investors’ownership.

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4|RESULTS

4.1 |Descriptive statistics and analysis

Table 1presents the descriptive statistics of the variables. The mean value of firms' GI, which is

the number of green invention patents granted, is 4.813, and the standard deviation is 31.358,

indicating that the dependent variable is over-dispersed. In Table 2, we calculated the variance

inflation factors (VIFs) and found that all of them are substantially below the acceptable level

of 10 (Hair et al., 1995), indicating that multicollinearity is not a significant issue.

Table 3presents the regression results. Model 1 is the baseline model that includes only the

exploratory and control variables. Model 2 includes the moderating variables, Ascribed political

tie,Achieved political tie and Institutional development. The coefficient of the explanatory vari-

able, PR investors, is positive and statistically significant in Model 2, providing support for

Hypothesis 1a, which suggests that PR investors have a positive impact on corporate green

innovation. In Model 2, the coefficient of the explanatory variable, PS investors, is negative and

significant, lending support for Hypothesis 1b, which suggests that PS investors have a negative

impact on green innovation.

We further analyse the moderating role of political ties by testing the effects of ascribed

political ties (whether the CEO/chair had government working experience) and achieved politi-

cal ties (whether the CEO/chair is serving as a delegate in PC or CPPCC) (Zhang et al., 2016).

Model 3 includes the explanatory variables, the moderator variables of the two types of political

ties, and their interaction terms. Firstly, the coefficient of the interaction term, PR investors 

Ascribed political tie, in Model 3 is negative and significant at the 1% level, lending support for

Hypothesis 2a, which predicts that strong ascribed political ties weaken the positive effects of

PR investors on corporate green innovation. Secondly, the coefficient of the interaction term,

PR investors Ascribed political tie, in Model 3 is insignificant, which rejects Hypothesis 2b.

Thirdly, the coefficient of the interaction term, PS investors Achieved political tie, in Model

3 is positive and significant at the 1% level, lending support for Hypothesis 2c, which predicts

that strong achieved political ties strengthen the positive effects of PR investors on green inno-

vation. Fourthly, the coefficient of the interaction term, PS investors Achieved political tie,in

Model 3 is positive and significant at the 5% level, lending support for Hypothesis 2d, which

predicts that strong achieved political ties weaken the negative effects of PS investors on corpo-

rate green innovation.

Model 4 includes explanatory variables, moderator variables, Institutional development and

their interaction items. The coefficient of the interaction term, PS investors Institutional devel-

opment, in Model 4 is positive and significant, lending support for Hypothesis 3a, which pre-

dicts that better institutional development reinforces the positive effects of PR investors on

green innovation. The coefficient of the interaction term, PS investors Institutional develop-

ment, in Model 4 is positive but insignificant, which cannot support Hypothesis 3b. Collectively,

Model 5 includes all the interaction items, which further support our argument below.

4.2 |Robustness tests

Firstly, we used another measurement of GI, which was measured by the number of forward

citations of green invention patents, excluding self-citation for each year (He & Tian, 2013;

Piperopoulos et al., 2018; Ren et al., 2022). The citations of patents can better reflect the

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TABLE 2 Correlation matrix.

Variable (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) VIF

(1) Green innovation 1 -

(2) PR investors 0.011 1 1.13

(3) PS investors 0.005 0.114*** 1 1.02

(4) Ascribed political tie 0.008 0.010 0.003 1 1.02

(5) Achieved political tie 0.013*0.066*** 0.021*** 0.076*** 1 1.06

(6) Institutional

development

0.093*** 0.084*** 0.040*** 0.045*** 0.072*** 1 1.73

(7) Firm size 0.262*** 0.084*** 0.046*** 0.047*** 0.040*** 0.134*** 1 1.53

(8) Firm age 0.056*** 0.148*** 0.045*** 0.018*** 0.001 0.412*** 0.198*** 1 1.36

(9) Leverage 0.074*** 0.079*** 0.039*** 0.043*** 0.143*** 0.220*** 0.240*** 0.033*** 1 1.58

(10) ROA 0.017** 0.244*** 0.072*** 0.005 0.098*** 0.125*** 0.077*** 0.022*** 0.431*** 1 1.37

(11) Tobin's Q 0.046*** 0.026*** 0.022*** 0.028*** 0.023*** 0.135*** 0.315*** 0.168*** 0.092*** 0.032*** 1 1.25

(12) R&D intensity 0.071*** 0.001 0.018*** 0.063*** 0.038*** 0.428*** 0.014** 0.134*** 0.323*** 0.086*** 0.150*** 1 1.38

(13) State ownership 0.031*** 0.098*** 0.036*** 0.013*0.137*** 0.473*** 0.003 0.323*** 0.152*** 0.061*** 0.200*** 0.281*** 1 1.41

(14) Board size 0.017*** 0.075*** 0.019*** 0.044*** 0.015** 0.216*** 0.201*** 0.067*** 0.143*** 0.005 0.133*** 0.165*** 0.201*** 1 1.13

(15) Big 4 Auditor 0.166*** 0.078*** 0.026*** 0.014** 0.036*** 0.001 0.289*** 0.020*** 0.059*** 0.052*** 0.075*** 0.049*** 0.054*** 0.102*** 1 1.11

(16) Market competition 0.016** 0.000 0.002 0.002 0.022*** 0.093*** 0.025*** 0.059*** 0.080*** 0.034*** 0.070*** 0.179*** 0.029*** 0.052*** 0.047*** 1 1.04

Note:N=22,173. See variables definitions in Table A1. Pearson's correlation coefficients are shown in the matrix. The mean value of variance inflation factors (VIF) is 1.27. PR investors is the pressure-resistant institutional investors’

ownership; PS investors is the pressure-sensitive institutional investors’ownership.

*p< 0.1.**p< 0.05.***p< 0.01.

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TABLE 3 Institutional investors and green innovation.

Dependent

variable =green

innovation (total

number of green

inventions) (1) (2) (3) (4) (5)

PR investors (H1a) 2.220*** 2.124*** 1.810*** 2.720*** 2.376***

(0.203) (0.203) (0.272) (0.229) (0.294)

PS investors (H1b)6.156*** 6.243*** 7.166*** 6.399*** 7.402***

(0.627) (0.621) (0.763) (0.625) (0.767)

Ascribed political

tie

0.069 0.089** 0.076* 0.091**

(0.043) (0.043) (0.042) (0.043)

Achieved political

tie

0.188*** 0.166*** 0.194*** 0.173***

(0.032) (0.033) (0.032) (0.033)

Institutional

development

0.078*** 0.078*** 0.077*** 0.076***

(0.010) (0.010) (0.010) (0.010)

PR investors 

Ascribed political

tie (H2a)

1.590*** 1.085*

(0.591) (0.600)

PS investors 

Ascribed political

tie (H2b)

1.288 0.876

(1.984) (1.993)

PR investors 

Achieved

political tie (H2c)

1.038*** 0.931**

(0.378) (0.384)

PS investors 

Achieved

political tie

(H2d)

3.124** 3.467**

(1.395) (1.413)

PR investors 

Institutional

development

(H3a)

0.729*** 0.693***

(0.109) (0.110)

PS investors 

Institutional

development

(H3b)

0.132 0.147

(0.292) (0.289)

Firm size 0.854*** 0.840*** 0.842*** 0.841*** 0.843***

(0.018) (0.018) (0.018) (0.018) (0.018)

Firm age 0.006** 0.008*** 0.008*** 0.008*** 0.008***

(0.003) (0.003) (0.003) (0.003) (0.003)

Leverage 0.242** 0.328*** 0.327*** 0.309*** 0.311***

(0.094) (0.094) (0.094) (0.094) (0.094)

ROA 1.797*** 1.646*** 1.706*** 1.581*** 1.641***

(0.264) (0.263) (0.263) (0.263) (0.264)

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innovation efficiency and their value in the commercial sphere. Overall, Table 4demonstrates

that our results are insensitive to an alternative measure of GI performance.

Secondly, we used another definition of the institutional investors holding. In our main

analysis (Table 3), we summed up the proportion of shares held by these PR investors and PS

investors (owning at least 1% of a firm's equity) (Kochhar & David, 1996). Here, we measure the

shareholding of institutional investors (including PR investors and PS investors) with a share-

holding ratio of more than 0% (i.e., including all the institutional investors even if their

shareholding is lower than 1%). Table 5demonstrates that our results are still robust.

Thirdly, it is possible that Chinese state-owned enterprises (SOEs) may have less motivation

to establish connections with institutional investors and the government, given that they are

part of the bureaucratic system (Hung et al., 2012). However, non-SOEs may be more eager to

attract investors for financial support and to involve them in corporate governance (Rong

TABLE 3 (Continued)

Dependent

variable =green

innovation (total

number of green

inventions) (1) (2) (3) (4) (5)

Tobin's Q 0.012 0.013 0.014 0.012 0.013

(0.015) (0.015) (0.015) (0.015) (0.015)

R&D intensity 8.578*** 8.379*** 8.354*** 8.237*** 8.244***

(0.636) (0.630) (0.628) (0.628) (0.627)

State ownership 0.244** 0.119 0.101 0.107 0.094

(0.107) (0.108) (0.109) (0.108) (0.108)

Board size 0.009 0.009 0.009 0.011 0.011

(0.009) (0.009) (0.009) (0.009) (0.009)

Big4 Auditor 0.159** 0.191*** 0.206*** 0.199*** 0.213***

(0.073) (0.073) (0.074) (0.073) (0.074)

Market competition 3.116*** 3.025*** 3.008*** 2.970*** 2.973***

(0.480) (0.478) (0.479) (0.477) (0.477)

Constant 21.404*** 21.455*** 21.499*** 21.500*** 21.542***

(0.405) (0.408) (0.408) (0.407) (0.408)

Year dummies Yes Yes Yes Yes Yes

Industry dummies Yes Yes Yes Yes Yes

N22,173 22,173 22,173 22,173 22,173

Log likelihood 34732.01 34684.39 34673.14 34660.79 34651.79

LR χ

2

10394.59 10489.83 10512.33 10537.02 10555.01

Prob > χ

2

0.00 0.00 0.00 0.00 0.00

Note: This table reports the results of the effects of institutional investors on firm green innovation. The sample period is from

2003 to 2018. See variables definitions in Table A1.PR investors is the pressure-resistant institutional investors’ownership; PS

investors is the pressure-sensitive institutional investors’ownership. Standard errors are in parentheses. *, **, and *** indicate

significance at the 10%, 5%, and 1% levels, respectively.

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TABLE 4 Alternative measurement of green innovation.

Dependent

variable =green

innovation (total

citation of green

inventions) (1) (2) (3) (4) (5)

PR investors 3.653*** 3.471*** 3.274*** 4.088*** 3.896***

(0.206) (0.206) (0.275) (0.240) (0.305)

PS investors 4.104*** 4.376*** 5.013*** 4.131*** 4.824***

(0.534) (0.526) (0.584) (0.589) (0.662)

Ascribed political

tie

0.003 0.028 0.006 0.023

(0.040) (0.041) (0.040) (0.041)

Achieved political

tie

0.270*** 0.243*** 0.273*** 0.248***

(0.032) (0.032) (0.032) (0.032)

Institutional

development

0.056*** 0.056*** 0.049*** 0.050***

(0.010) (0.010) (0.010) (0.010)

PR investors 

Ascribed political

tie

1.915*** 1.487***

(0.576) (0.572)

PS investors 

Ascribed political

tie

0.079 0.776

(1.548) (1.576)

PR investors 

Achieved

political tie

0.809** 0.586

(0.398) (0.398)

PS investors 

Achieved

political tie

4.695*** 5.034***

(1.445) (1.453)

PR investors 

Institutional

development

0.571*** 0.523***

(0.099) (0.100)

PS investors 

Institutional

development

1.509*** 1.505***

(0.266) (0.259)

Firm size 0.866*** 0.852*** 0.849*** 0.855*** 0.852***

(0.017) (0.017) (0.017) (0.017) (0.017)

Firm age 0.002 0.003 0.003 0.004 0.003

(0.003) (0.003) (0.003) (0.003) (0.003)

Leverage 0.048 0.037 0.058 0.026 0.047

(0.087) (0.087) (0.087) (0.087) (0.087)

ROA 1.649*** 1.551*** 1.624*** 1.541*** 1.608***

(0.243) (0.243) (0.243) (0.242) (0.243)

Tobin's Q 0.071*** 0.076*** 0.077*** 0.076*** 0.077***

(0.015) (0.015) (0.015) (0.015) (0.015)

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et al., 2017). Additionally, non-SOEs may also aim to build political ties with the government to

reduce ownership discrimination and gain certain benefits such as easier access to bank loans

(Haveman et al., 2017). To test this possibility, we removed SOEs from our sample and created

a new sample of observations (5974 observations were dropped). As shown in Table 6, the

results of the non-SOE sample remain qualitatively unchanged, providing further support for

our hypothesis.

To address potential endogeneity issues, we employed the generalized method of moments

(GMM) technique in this study. We utilized the logarithm of the number of green inventions

plus one as the dependent variable, and lagged values of the independent variables (i.e., PR

investors

t-1

and PS investors

t-1

) as instrumental variables (IVs). We chose these variables as IVs

based on the assumption that events and decisions related to them occurred in the past and are

not correlated with the present error term (Bellemare et al., 2017; Harjoto et al., 2017; Wang

et al., 2012). We conducted a weak identification test and found that the Cragg–Donald Wald F

statistic was 3379.56, which is well above the 10% maximum IV relative bias (7.03). Table 7dis-

plays the results of the GMM estimation, which are consistent with those reported in Table 3.

TABLE 4 (Continued)

Dependent

variable =green

innovation (total

citation of green

inventions) (1) (2) (3) (4) (5)

R&D intensity 12.142*** 11.934*** 11.919*** 11.809*** 11.820***

(0.627) (0.622) (0.621) (0.620) (0.619)

State ownership 0.059 0.134 0.139 0.155 0.156

(0.098) (0.100) (0.100) (0.099) (0.100)

Board size 0.000 0.002 0.002 0.000 0.000

(0.008) (0.008) (0.008) (0.008) (0.008)

Big4 Auditor 0.154** 0.228*** 0.249*** 0.220*** 0.237***

(0.072) (0.072) (0.073) (0.072) (0.072)

Market competition 1.423*** 1.437*** 1.323*** 1.486*** 1.371***

(0.451) (0.449) (0.447) (0.448) (0.447)

Constant 19.688*** 19.715*** 19.670*** 19.795*** 19.755***

(0.378) (0.381) (0.380) (0.380) (0.380)

Year dummies Yes Yes Yes Yes Yes

Industry dummies Yes Yes Yes Yes Yes

N22,173 22,173 22,173 22,173 22,173

Log likelihood 44221.38 44168.89 44154.42 44133.66 44121.43

LR χ

2

9727.27 9832.25 9861.19 9902.71 9927.17

Prob > χ

2

0.00 0.00 0.00 0.00 0.00

Note: This table reports the results of robustness tests by using alternative measurement of dependent variable (total citation of

green inventions). The sample period is from 2003 to 2018. See variables definitions in Table A1. PR investors is the pressure-

resistant institutional investors’ownership; PS investors is the pressure-sensitive institutional investors’ownership. Standard

errors are in parentheses. *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively.

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TABLE 5 Alternative measurement of institutional investors’ownership (shareholding > 0%).

Dependent

variable =green

innovation (total

number of green

inventions) (1) (2) (3) (4) (5)

PR investors 1.679*** 1.602*** 1.452*** 1.879*** 1.695***

(0.151) (0.151) (0.193) (0.160) (0.200)

PS investors 4.002*** 4.125*** 5.246*** 4.345*** 5.472***

(0.579) (0.575) (0.689) (0.592) (0.706)

Ascribed political

tie

0.069 0.100** 0.073* 0.099**

(0.043) (0.043) (0.043) (0.043)

Achieved political

tie

0.189*** 0.156*** 0.195*** 0.163***

(0.032) (0.033) (0.032) (0.033)

Institutional

development

0.078*** 0.078*** 0.074*** 0.074***

(0.010) (0.010) (0.010) (0.010)

PR investors 

Ascribed political

tie

1.329*** 1.141***

(0.399) (0.402)

PS investors 

Ascribed political

tie

0.986 0.833

(1.858) (1.878)

PR investors 

Achieved

political tie

0.714*** 0.710***

(0.273) (0.274)

PS investors 

Achieved

political tie

4.104*** 4.172***

(1.327) (1.351)

PR investors 

Institutional

development

0.441*** 0.424***

(0.076) (0.076)

PS investors 

Institutional

development

0.502* 0.482*

(0.276) (0.271)

Firm size 0.833*** 0.820*** 0.823*** 0.821*** 0.824***

(0.018) (0.018) (0.018) (0.018) (0.018)

Firm age 0.006** 0.008*** 0.008*** 0.009*** 0.009***

(0.003) (0.003) (0.003) (0.003) (0.003)

Leverage 0.257*** 0.341*** 0.344*** 0.320*** 0.324***

(0.095) (0.095) (0.095) (0.095) (0.094)

ROA 1.655*** 1.509*** 1.576*** 1.456*** 1.524***

(0.268) (0.267) (0.268) (0.267) (0.267)

Tobin's Q 0.003 0.002 0.001 0.004 0.001

(0.016) (0.016) (0.016) (0.016) (0.016)

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5|FURTHER ANALYSIS

To help further understand the main effects, we analysed the underlying mechanisms through

which the two types of institutional investor affect corporate green innovation. We also con-

ducted some heterogeneity tests to provide evidence to consolidate our main findings.

5.1 |Mechanism analysis

Although the previous empirical findings suggest a relationship between institutional investors

and corporate green innovation, the underlying mechanisms remain unclear. We aim to shed

light on the economic channels through which institutional investors affect green innovation.

One possible explanation is that firms with different types of institutional investors have differ-

ent temporal foci or time perceptions (DesJardine & Shi, 2021; Shipp et al., 2022). Firms that

TABLE 5 (Continued)

Dependent

variable =green

innovation (total

number of green

inventions) (1) (2) (3) (4) (5)

R&D intensity 8.443*** 8.249*** 8.211*** 8.127*** 8.106***

(0.637) (0.631) (0.629) (0.629) (0.628)

State ownership 0.252** 0.126 0.121 0.114 0.110

(0.107) (0.108) (0.108) (0.108) (0.108)

Board size 0.008 0.009 0.008 0.011 0.010

(0.009) (0.009) (0.009) (0.009) (0.009)

Big4 Auditor 0.146** 0.180** 0.197*** 0.196*** 0.211***

(0.073) (0.074) (0.074) (0.074) (0.074)

Market competition 3.046*** 2.955*** 2.937*** 2.903*** 2.895***

(0.478) (0.477) (0.478) (0.476) (0.476)

Constant 21.016*** 21.084*** 21.136*** 21.109*** 21.162***

(0.409) (0.412) (0.412) (0.412) (0.412)

Year dummies Yes Yes Yes Yes Yes

Industry dummies Yes Yes Yes Yes Yes

N22,713 22,173 22,173 22,173 22,173

Log likelihood 34748.17 34700.95 34685.39 34680.00 34665.91

LR χ

2

10362.26 10456.71 10487.83 10498.60 10526.78

Prob > χ

2

0.00 0.00 0.00 0.00 0.00

Note: This table reports the results of robustness tests by using alternative measurement of independent variables (including all

the institutional investors ownership where shareholding is higher than 0%). The sample period is from 2003 to 2018. See

variables definitions in Table A1.PR investors is the pressure-resistant institutional investors’ownership; PS investors is the

pressure-sensitive institutional investors’ownership. Standard errors are in parentheses. *, **, and *** indicate significance at

the 10%, 5%, and 1% levels, respectively.

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TABLE 6 Analysis by using non-SOEs sample.

Dependent

variable =green

innovation (total

number of green

inventions) (1) (2) (3) (4) (5)

PR investors 2.792*** 2.637*** 2.425*** 2.863*** 2.656***

(0.252) (0.249) (0.357) (0.258) (0.365)

PS investors 7.518*** 7.809*** 9.436*** 9.014*** 11.923***

(0.736) (0.735) (0.969) (0.804) (1.127)

Ascribed political

tie

0.077 0.089* 0.111** 0.121**

(0.049) (0.049) (0.049) (0.049)

Achieved political

tie

0.186*** 0.174*** 0.202*** 0.189***

(0.035) (0.035) (0.035) (0.035)

Institutional

development

0.065*** 0.065*** 0.070*** 0.071***

(0.012) (0.012) (0.012) (0.012)

PR investors 

Ascribed political

tie

2.381*** 2.261***

(0.811) (0.833)

PS investors 

Ascribed political

tie

2.396 3.577

(2.293) (2.387)

PS investors 

Achieved

political tie

0.775* 0.785

(0.467) (0.484)

PS investors 

Achieved

political tie

3.872** 5.673***

(1.504) (1.632)

PR investors 

Institutional

development

0.283* 0.285*

(0.157) (0.159)

PS investors 

Institutional

development

1.438*** 1.941***

(0.445) (0.471)

Firm size 0.772*** 0.867*** 0.868*** 0.760*** 0.761***

(0.020) (0.021) (0.021) (0.020) (0.020)

Firm age 0.005 0.008** 0.008** 0.005 0.005

(0.004) (0.004) (0.004) (0.004) (0.004)

Leverage 0.567*** 0.447*** 0.443*** 0.605*** 0.598***

(0.106) (0.106) (0.106) (0.106) (0.106)

ROA 2.051*** 1.661*** 1.708*** 1.866*** 1.915***

(0.293) (0.294) (0.295) (0.293) (0.293)

Tobin's Q 0.019 0.020 0.022 0.016 0.015

(0.016) (0.016) (0.016) (0.016) (0.016)

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prioritize immediate benefits or are content with the status quo may exhibit short-sighted

behaviour (Chen, He, et al., 2022). To quantify managerial myopia, we measured the frequency

of short-sighted words in the Management Discussion and Analysis (MD&A) section of the

annual report and divided it by the total number of words in the MD&A section using machine-

learning techniques (Chen, He, et al., 2022).

To test the mediation effect, we employed a stepwise regression approach (Baron &

Kenny, 1986), Sobel tests, and bootstrapping methods for confidence intervals

(Sobel, 1982). In Model 1 of Table 8, we included all the independent and control vari-

ables, but not managerial myopia. We first examined the effect of PR investor ownership

on managerial myopia. Model 2 of Table 8shows a negative and statistically significant

coefficient on PR investors (β=0.161, p< 1%), suggesting that PR investors reduce man-

agerial myopia. We then examined the effect of PS investor ownership on managerial myo-

pia. Model 2 of Table 8also shows a positive and statistically significant coefficient on PS

investors (β=1.199, p< 1%), suggesting that PS investors enhance managerial myopia.

Model 3 of Table 8shows a negative and statistically significant coefficient on managerial

TABLE 6 (Continued)

Dependent

variable =green

innovation (total

number of green

inventions) (1) (2) (3) (4) (5)

R&D intensity 9.276*** 8.884*** 8.843*** 8.960*** 8.913***

(0.697) (0.688) (0.686) (0.690) (0.687)

State ownership 0.895 1.491 1.459 0.849 0.879

(1.346) (1.369) (1.368) (1.341) (1.340)

Board size 0.002 0.009 0.008 0.002 0.002

(0.011) (0.011) (0.011) (0.011) (0.011)

Big4 Auditor 0.071 0.202** 0.196** 0.042 0.038

(0.091) (0.092) (0.092) (0.091) (0.091)

Market competition 2.352*** 3.226*** 3.221*** 2.322*** 2.342***

(0.585) (0.592) (0.593) (0.584) (0.584)

Constant 16.025*** 21.761*** 21.776*** 16.192*** 16.170***

(0.560) (0.523) (0.523) (0.555) (0.556)

Year dummies Yes Yes Yes Yes Yes

Industry dummies Yes Yes Yes Yes Yes

N16,199 16,199 16,199 16,199 16,199

Log likelihood 27244.43 27131.07 27121.36 27201.63 27189.76

Wald χ

2

6869.58 7096.29 7115.72 6955.18 6978.91

Prob > χ

2

0.00 0.00 0.00 0.00 0.00

Note: This table reports the results of robustness tests by using a subsample of the non-state-owned enterprises. The sample

period is from 2003 to 2018. See variables definitions in Table A1.PR investors is the pressure-resistant institutional investors’

ownership; PS investors is the pressure-sensitive institutional investors’ownership. Standard errors are in parentheses. *, **,

and *** indicate significance at the 10%, 5%, and 1% levels, respectively.

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TABLE 7 The robust test of generalized method of moments (GMM) model.

Dependent variable =green

innovation (total number of

green inventions) (1) (2) (3) (4) (5)

PR investors 0.974*** 0.873*** 0.423** 1.815*** 1.395***

(0.163) (0.164) (0.190) (0.215) (0.232)

PS investors 0.972** 1.190** 2.311*** 0.495 2.243***

(0.476) (0.474) (0.449) (0.734) (0.723)

Ascribed political tie 0.043*** 0.048*** 0.046*** 0.051***

(0.017) (0.017) (0.017) (0.017)

Achieved political tie 0.099*** 0.071*** 0.104*** 0.077***

(0.013) (0.014) (0.013) (0.014)

Institutional development 0.020*** 0.020*** 0.018*** 0.018***

(0.004) (0.004) (0.004) (0.004)

PR investors Ascribed political

tie

0.977** 0.805**

(0.381) (0.382)

PS investors Ascribed political

tie

2.277 1.551

(1.983) (2.046)

PR investors Achieved political

tie

1.314*** 1.276***

(0.305) (0.306)

PS investors Achieved political

tie

5.870*** 5.959***

(1.909) (1.898)

PR investors Institutional

development

0.676*** 0.692***

(0.072) (0.072)

PS investors Institutional

development

0.375* 0.003

(0.221) (0.214)

Firm size 0.341*** 0.339*** 0.341*** 0.338*** 0.341***

(0.007) (0.007) (0.007) (0.007) (0.007)

Firm age 0.001 0.001 0.000 0.001 0.001

(0.001) (0.001) (0.001) (0.001) (0.001)

Leverage 0.361*** 0.394*** 0.386*** 0.390*** 0.379***

(0.033) (0.034) (0.034) (0.034) (0.034)

ROA 0.130 0.114 0.151 0.112 0.139

(0.097) (0.097) (0.098) (0.098) (0.098)

Tobin's Q 0.013** 0.015*** 0.017*** 0.017*** 0.019***

(0.005) (0.005) (0.005) (0.005) (0.005)

R&D intensity 4.322*** 4.273*** 4.328*** 4.106*** 4.160***

(0.230) (0.229) (0.231) (0.231) (0.232)

State ownership 0.121*** 0.073* 0.044 0.054 0.028

(0.039) (0.039) (0.039) (0.039) (0.039)

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myopia (β=1.673, p< 1%), suggesting that managerial myopia is negatively associated

with green innovation. The Sobel test confirms the significance of the mediation effect of

managerial myopia (see Table A2). In summary, our results suggest that firms with more

PR investors' ownership exhibit less myopic behaviour, which, in turn, promotes green

innovation. Conversely, firms with more PS investorownershiparemoremyopic,which

stifles green innovation.

5.2 |Heterogeneity analysis

5.2.1 | Heterogeneity of firm size

We investigated how ownership heterogeneity can affect the relationship between institutional

investors and GI performance, with a focus on one internal characteristic of firms: firm size.

Our main analysis results (Table 9) show that firm size has a significant effect on firms'

GI. Larger firms typically have easier access to financing and stricter internal supervision,

which may make them less sensitive to institutional pressure. As such, firms of different sizes

may have different preferences for alternative mechanisms when facing diverse institutional

pressures. To test the effect of firm size, we divided the sample firms into two groups based on

their size, with firms above the median categorized as large firms and those below categorized

as small firms (Cao et al., 2021). The results, reported in Columns (1) and (2) of Table 9,

TABLE 7 (Continued)

Dependent variable =green

innovation (total number of

green inventions) (1) (2) (3) (4) (5)

Board size 0.011*** 0.011*** 0.011*** 0.013*** 0.013***

(0.003) (0.003) (0.003) (0.003) (0.003)

Big4 Auditor 0.206*** 0.209*** 0.212*** 0.216*** 0.220***

(0.029) (0.029) (0.030) (0.030) (0.030)

Market competition 0.880*** 0.903*** 0.906*** 0.954*** 0.962***

(0.171) (0.171) (0.171) (0.171) (0.172)

Constant 7.651*** 7.733*** 7.785*** 7.805*** 7.865***

(0.143) (0.144) (0.145) (0.145) (0.145)

Year dummies Yes Yes Yes Yes Yes

Industry dummies Yes Yes Yes Yes Yes

N22,173 22,173 22,173 22,173 22,173

F220.09 211.69 197.32 205.00 191.66

Anderson canon. Corr. LM

statistic

4575.57 4578.87 1501.87 2827.03 1536.35

Cragg-Donald Wald F statistic 2875.23 2877.45 267.72 807.77 205.73

Note: This table reports the results of GMM models. The sample period is from 2003 to 2018. See variables definitions in

Table A1.PR investors is the pressure-resistant institutional investors’ownership; PS investors is the pressure-sensitive

institutional investors’ownership. Standard errors are in parentheses. *, **, and *** indicate significance at the 10%, 5%, and 1%

levels, respectively.

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indicate that smaller firms are more sensitive to the influence of institutional investors com-

pared to larger firms.

5.2.2 | Heterogeneity of industries (polluting versus non-polluting)

We examined the effect of one of the industry characteristics, specifically whether firms are cat-

egorized as polluting or non-polluting. Polluting firms face strict environmental regulations,

which can reduce information asymmetry (e.g., mandatory CSR disclosure) and make them

more sensitive to institutional pressure (Li & Lu, 2015; Ren et al., 2022). As a result, polluting

firms may be more inclined towards environmental investment and technology updating due to

legitimacy pressure (Li et al., 2020). We divided the sample firms into two groups according

to whether they were categorized as polluting or non-polluting and examined the effect of insti-

tutional investors on GI performance separately for each group. The results, presented in Col-

umns (3) and (4) of Table 9, indicate that, contrary to non-polluting firms, polluting firms are

more sensitive to the influence of institutional investors.

TABLE 8 Channel analysis.

Dependent variable =

(1) (2) (3)

Green innovation Managerial myopia Green innovation

PR investors 2.124*** 0.161*** 1.943***

(0.203) (0.014) (0.203)

PS investors 6.243*** 1.199*** 5.744***

(0.621) (0.040) (0.632)

Ascribed political tie 0.069 0.002 0.076*

(0.043) (0.003) (0.042)

Achieved political tie 0.188*** 0.008*** 0.171***

(0.032) (0.002) (0.033)

Institutional development 0.078*** 0.003*** 0.076***

(0.010) (0.001) (0.010)

Managerial myopia 1.673***

(0.148)

Control variables Yes Yes Yes

Year and Industry dummies Yes Yes Yes

N22,173 22,173 22,173

Log likelihood 34684.39 - 34618.02

LR χ

2

/F 10489.83 32.37 10622.57

Prob. >χ

2

0.00 0.00 0.00

Note: This table reports the results of the channel analysis. The sample period is from 2003 to 2018. See variables definitions in

Table A1.PR investors is the pressure-resistant institutional investors’ownership; PS investors is the pressure-sensitive

institutional investors’ownership. Control variables include Firm size,Firm age,Leverage,ROA,Tobin's Q,R&D intensity,State

ownership,Board size,Big4 Auditor,Market competition and constant are included but not reported for saving space. Standard

errors are in parentheses. *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively.

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TABLE 9 The heterogeneity analysis.

Dependen variable =green innovation (total

number of green inventions)

(1) (2) (1) (4) (5) (6)

Small firm Large firm

Pollution

industry

Non-pollution

industry

High

competition

Low

competition

PR investors 2.626*** 1.710*** 3.168*** 1.090*** 3.041*** 0.965***

(0.345) (0.273) (0.324) (0.270) (0.288) (0.303)

PS investors 10.407*** 4.696*** 7.807*** 5.091*** 7.815*** 4.913***

(1.430) (0.706) (1.013) (0.794) (0.934) (0.882)

Ascribed political tie 0.094 0.162*** 0.206*** 0.098* 0.054 0.163***

(0.087) (0.048) (0.065) (0.057) (0.057) (0.063)

Achieved political tie 0.078 0.227*** 0.185*** 0.179*** 0.189*** 0.191***

(0.060) (0.038) (0.052) (0.041) (0.044) (0.047)

Institutional development 0.064*** 0.102*** 0.097*** 0.067*** 0.044*** 0.117***

(0.020) (0.012) (0.016) (0.014) (0.014) (0.015)

Control variables Yes Yes Yes Yes Yes Yes

Year and Industry dummies Yes Yes Yes Yes Yes Yes

N11,087 11,086 11,115 11,058 11,096 11,077

Log likelihood 10891.92 23423.26 12521.25 22026.13 18470.99 16151.09

LR χ

2

2037.71 6354.16 3366.48 5828.43 5198.79 5324.34

Prob > χ

2

0.00 0.00 0.00 0.00 0.00 0.00

Note: This table reports the results of the heterogeneity analysis. We consider the heterogeneity between small and large firms (Model 1 and 2), polluting and non-polluting firms (Model 3 and

4) and firm facing different levels of market competition (Model 5 and 6). The sample period is from 2003 to 2018. See variables definitions in Table A1.PR investors is the pressure-resistant

institutional investors' ownership; PS investors is the pressure-sensitive institutional investors' ownership. Control variables include Firm size, Firm age, Leverage, ROA, Tobin's Q, R&D

intensity, State ownership, Board size, Big4 Auditor, Market competition and constant are included but not reported for saving space. Standard errors are in parentheses. *, **, and *** indicate

significance at the 10%, 5%, and 1% levels, respectively.

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5.2.3 | Heterogeneity of market competition

We hypothesize that institutional investors have different effects on green innovation

depending on the level of competition firms face. Although R&D can help firms increase prod-

uct differentiation (Hombert & Matray, 2018), market competition can also influence their dif-

ferentiation strategy (Duanmu et al., 2018). To test this hypothesis, we divided the sample firms

into higher and lower market competition groups, and the results are reported in Columns

(5) and (6) of Table 9. Higher competition places constant pressure on firms to meet social

expectations while inducing higher punishment or rewards for specific behaviours. Our results

show that, contrary to firms facing lower market competition, firms facing higher market com-

petition are more sensitive to the influence of institutional investors in making decisions

regarding green innovation.

6|CONCLUSION AND IMPLICATIONS

Using a sample of Chinese manufacturing firms listed on the SHSE and SZSE from 2003 to

2018, our study investigates the heterogeneous effects of institutional investors on corporate

green innovation. We find that PR investors significantly enhance green innovation, whereas

PS investors hinder it. Ascribed political ties weaken the positive relationship between PR

investors and green innovation (i.e., a buffering effect), while achieved political ties strengthen

the positive association between PR investors and green innovation and weaken the negative

association between PS investors and green innovation (i.e., a binding effect). We also find that

institutional development moderates the relationship between institutional investors and green

innovation. Our study reveals the channel through which institutional investors influence

green innovation, namely, managerial myopia. Furthermore, we find that institutional inves-

tors' effects on green innovation are more significant in small firms, polluting firms, and firms

facing higher levels of market competition. These findings highlight how market actors (such as

investors) interact with governments (such as visible hands) and institutions to influence corpo-

rate green innovation and environmental concerns.

6.1 |Theoretical implications

Our study aims to answer the question of what drives a company's engagement with particular

stakeholders, going beyond the traditional micro-foundation argument of corporate green inno-

vation. We adopt a multi-stakeholder perspective and find that corporate green innovation is

influenced by both primary and secondary stakeholder engagement. Firms with more PR inves-

tors prioritize secondary stakeholders' concerns, such as local communities' sustainability inter-

ests, while those with more PS investors prioritize primary stakeholders' concerns, such as

employee and stakeholder interests. Different stakeholder demands generate varying pressures

on firms to invest in green innovation, and we show that PR investors significantly enhance

green innovation, while PS investors hinder it.

Furthermore, our study highlights the importance of the alignment or ‘fit’between market

actors, political actors, and the situation as joint determinants of corporate green innovation.

Ascribed political ties serve as a buffer from institutional pressure, allowing firms to ignore or

fend off external claims. We find that ascribed political ties weaken the positive relationship

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between PR investors and green innovation, while achieved political ties strengthen the positive

association between PR investors and green innovation and weaken the negative association

between PS investors and green innovation. Our results suggest that executives with prior gov-

ernment working experience or fruitful political capital are less able to benefit from the moni-

toring effect or resources coming from market actors such as institutional investors. In this

regard, the multiple sources of institutional pressure perspective can shed more light on future

research.

6.2 |Practical implications

We suggest the following recommendations to enhance environmental concerns and corporate

green innovation. Firstly, firms should actively engage and cooperate with institutional inves-

tors, communicate and coordinate with them, and work towards a harmonious relationship to

achieve long-term development goals. As enterprises engage in green technology innovation,

improve social responsibility performance, and invest in long-term development, they should

attract PR investors to participate in governance activities and interact with appropriate stake-

holders through signal transmission activities in the capital market. Although green innovation

and broader green governance activities may decrease corporate profits in the short term, they

may improve overall corporate performance in the long run.

Secondly, considering the moderating role of political ties, we suggest that entrepreneurs

should actively engage with local governments to establish open channels of communication

before making long-term investments such as green innovation. This can help to foster a better

understanding of local concerns and create a conducive environment for the development of

green innovation. At the same time, the government should regulate the behaviour of short-

term institutional investors, such as PS investors, who may prioritize short-term profits over

long-term sustainability. This will help to ensure that the government and market forces can

interact positively and promote corporate green innovation through the participation of multi-

ple stakeholders.

Thirdly, we recommend that firms should not only rely on government support but also

actively seek the participation of appropriate investors through various channels, such as the

capital market, product market, and supply chain. By engaging with multiple stakeholders,

firms can receive valuable feedback and resources to support their green innovation initiatives,

ultimately improving their environmental performance and long-term competitiveness.

Our final recommendation is to improve the institutional environment to promote the role

of institutional investors in encouraging green innovation in firms. To achieve this, the govern-

ment, industry associations, and financial markets should collaborate to encourage more mar-

ket actors to participate in green innovation activities of firms, thus stimulating the guiding role

of the invisible hand in corporate social responsibility behaviour. Ultimately, creating a

favourable business environment can encourage more firms to engage in industrial transforma-

tion and green innovation.

6.3 |Limitations and future research

We acknowledge several limitations to our study that should be considered when interpreting

our findings. First, our sample is limited to Chinese manufacturing listed firms from 2003 to

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2018, which may not be representative of all firms in China, particularly small and medium-

sized enterprises that are not listed. Future research could expand the scope of the study to

include a broader range of firms through surveys or quasi-natural experiments (Guo

et al., 2023; Su, Xu, & Yang, 2023) to examine the impact of institutional investors on green

innovation and ESG for different types of firms.

Second, we have not fully explored the mechanisms underlying the relationship between

institutional investor ownership and green innovation, particularly in emerging economies.

Further research is needed to understand how institutional pressures and uncertainties shape

CSR decisions in the long term, as well as other institutional factors that affect economic

decision-making, such as policy uncertainty.

Finally, our study is limited to Chinese firms, which may not be generalizable to firms in

other countries. Future research could explore cross-country differences in the impact of institu-

tional investors on green innovation and ESG by examining firms from different home coun-

tries, such as Russia, India, South Africa, and Brazil, to gain a more comprehensive

understanding of the role of institutional investors in promoting sustainable business practices.

ORCID

Zhen Yang https://orcid.org/0000-0002-1223-0415

Dongwei Su https://orcid.org/0000-0002-6306-1850

Shulin Xu https://orcid.org/0000-0002-1018-3213

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