Can we Speak Sustainability into Existence? Shareholder Engagement and Corporate Innovation Strategy

Abstract

The Voice strategy applied to engagements on ESG issues might affect firms’ reporting decisions and symbolic ESG performance, but what about real decisions? In this study, we investigate the effect of environmental shareholder activism on target firms’ innovation strategies, particularly their green and dirty innovation output. We posit that the relationship is theoretically ambiguous and can be driven either by better monitoring and higher scrutiny by shareholders and stakeholders or by shorttermism, legitimacy gains, and career concerns. We utilize the Direct Acyclic Graph (DAG) to construct our empirical strategy. We also use a hurdle model coupled with propensity score matching and a difference in difference specification in an attempt to estimate an unbiased average treatment effect for the treated (ATT). The results of the first stage show no evidence of a relationship between shareholder environmental activism through shareholder proposals and a firm’s likelihood of engaging in either type of innovation. In the second stage, we find weak evidence for a negative relationship between environmental shareholder activism and dirty innovation. The estimated economic magnitude of this potentially causal relationship ranges from a 25% to a 53% reduction in dirty innovation output among target firms. However, we are unable to obtain reliable estimates for the relationship between environmental shareholder activism and green innovation. Through a cross-sectional analysis, we further show that firms subject to a higher regulatory environmental scrutiny through the TRI reporting requirements drive the negative relationship between environmental shareholder activism and dirty innovation, and we also find weak evidence for the superior ability of institutional activist to influence firms’ dirty innovation output. Our findings contribute to the voice versus exit debate by showing that voice can be effective in curbing firms’ negative environmental externalities but might not result in the provision of public goods. We inform the debate on shareholder proposal rules by showing that environmental shareholder proposals, often excluded by SEC rule 14a-8, have the potential to promote sustainability in the private sector.