The Twin Transition Paradox: Is Green Strategy Always Profitable? A Longitudinal Threshold Analysis of EU Firms

ABSTRACT The debate over the financial returns of environmental investments remains unsettled, largely because prior research has relied too heavily on linear modeling assumptions. Drawing on the natural resource‐based view, this study examines the nonlinear relationship between eco‐innovation and firm value using longitudinal data from EU‐27 firms for the period 2010–2024. By applying system GMM, MMQR, and panel threshold regression, the analysis provides robust evidence of a U‐shaped relationship. The findings show that eco‐innovation initially depresses firm value due to higher implementation and operating costs, but begins to generate stronger financial returns once the quadratic turning point at 30. 38 on the ECOINN scale is exceeded. At the same time, the panel threshold model identifies a distinct regime threshold at 24. 82, beyond which the marginal effect of eco‐innovation weakens but remains positive. The study also identifies a “twin transition paradox, ” a strategic tension that arises when firms pursue digital and green transformations simultaneously. Although these transitions may be complementary in the long run, their concurrent implementation can intensify competition for limited organizational resources, increase coordination costs, and weaken short‐term financial performance. In contrast to techno‐optimistic expectations, digital transformation is found to negatively moderate the eco‐innovation–firm value relationship in the smaller subsample for which digital disclosure is available. In contrast, environmental policy uncertainty does not significantly alter this pattern. The quantile results further indicate that the U‐shaped pattern is strongest among low‐ and mid‐value firms and weaker at the upper end of the firm‐value distribution. Taken together, these findings provide conditional rather than universal support for the profitability paradox. The managerial implications should therefore be interpreted as provisional guidance consistent with the evidence, rather than as firm prescriptions.