• Political risk enhances the economic value of green innovation but reduces that of non-green innovation. • Even for pollution prevention or control innovations, political risk enhances their economic value. • The positive link between political risk and eco-innovation is stronger in firms with board diversity and CSR committees. • Findings reveal how governance structures shape investor responses to innovation under political uncertainty. Political risk is a significant factor that directly and indirectly affects both innovative investment and firm stock volatility. While prior research has examined these relationships well, there is limited evidence on how political risk influences equity market reactions to innovation grants, particularly in distinguishing between green and non-green technologies. Using a 20-year panel dataset of U.S. non-financial firms, this study highlights that higher levels of political risk are positively (negatively) associated with the economic value of green (conventional) innovation. This finding remains consistent after robustness checks, including Oster’s test, entropy balancing, and instrumental variable analysis. Deeper analysis suggests that the positive effect of political risk persists even when eco-innovation involves pollution-prevention or control applications. Further analysis indicates that the relationship between political risk and the economic value of eco-innovation is significantly stronger in firms with more diverse boards and dedicated CSR committees, while showing no systematic association with firms’ life-cycle stages. Overall, the results offer unique implications for managers and policymakers to reassess their corporate innovation decisions in the face of political uncertainty.
Triet Le (Sun,) studied this question.
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