The Impacts of External Sustainability: Institutional Investors' Sustainable Identity, Corporate Environmental Responsibility, and Green Innovation

Motivated by the growing importance of corporate sustainable development and corporate executives' strong desire for shareholder input, this paper fulfills the research gap of corporate green innovation determinants from the view of institutional investors' sustainability, which is scarcely investigated in related research. Prior research (on green innovation determinants) mostly focused on internal sustainability's influencing effects (e.g., green absorptive capacity, green organizational identify); few investigated the role of external sustainability (e.g., institutional investors) in influencing corporate green innovation. We examine the potential impact of institutional investors' sustainable identity and corporate environmental responsibility efforts on green innovation, utilizing the difference-in-differences (DID) design along with Chinese-listed companies' data from 2010 to 2020. Our empirical results confirm that an institutional investor's sustainable identity has a promoting effect on corporate green innovation. This promoting effect is more pronounced in companies that perform better in environmental responsibility. Our cross-sectional analysis validates such better-performing effects. Additionally, we find that this external sustainable identity produces a shock effect similar to a sustainable rating from a third-party agency on corporate green innovation. Our study contributes to the literature on green innovations' external green (sustainable) determinants and the research on institutions' outcomes (prior research investigated institutional investors' various characteristics, such as ownership dispersion and site visit, on influencing corporate green innovation, though few determined whether their sustainable identity produced such effects).