Collateral damage: Environmental risk shocks and process innovation

Unforeseen events such as accidents and disasters cause substantial economic losses to firms worldwide each year. It is, therefore, crucial for firms to make targeted adjustments to their processes to effectively manage operational risks from such events. We examine whether and how firms engage in process innovation in response to elevated environmental risk. By exploiting exogenous shifts in environmental risk created by nearby spill and pollution (SP) accidents, we investigate the impact of such environmental risk exposure on the non-offending (i.e. victim) firms’ environmental process innovation (EPI). Using a stacked difference-in-differences (DiD) design, we find that higher risk exposure results in a substantial increase in firms’ EPI, exhibiting a 23.06% increment compared to the control group. Next, we find that the main effect is contingent on the non-offending firms’ degree of risk tolerance stemming from (i) political, (ii) local regulatory, and (iii) market-based factors. Interestingly, we also find evidence that higher risk exposure propagates through the non-offending firms’ supply chain, giving more credibility to the hypothesized mechanism. We further explore mechanisms (e.g. managerial attention and risk awareness) underlying this relationship and document the role of the severity of environmental accidents. To policymakers, our results highlight that heightened risk exposure can motivate firms’ sustainability efforts even at non-offending firms which, if leveraged (e.g. through timely nudges), could mitigate future environmental accidents.

• 저널Production and Operations Management
• 토픽Regulation and Compliance Studies · Strategy and Management
• DOI10.1177/10591478261484823
• 저자Yushan Zhou, Suvrat Dhanorkar, Jinbo Song