Does Environmentally Responsible Investment Enhance Firm Profitability? An Institutional Perspective

Adopting the institutional perspective as its theoretical underpinning, this study seeks to unearth the antecedents of the mixed results in the extant literature on the association between environmentally responsible investment (ERI) and firm profitability. The study sample comprises an unbalanced sample of 2290 firm-year observations of China’s A-share listed firms for the period 2010–2019. The findings indicate that ERI enhances firms’ profitability, and the positive association is reinforced by the promulgation of environmental protection law. Regional development also augments ERI’s positive effect on firms’ profitability. Nevertheless, no significant association is observed between firms’ profitability and ERI within firms operating in environmentally sensitive sectors. Our findings imply that in addition to regulatory forces, normative and cognitive pressures are also important factors that governments may employ to motivate firms to become environmentally friendly and embrace sustainable practices. Theoretically, we content that these factors serve as a link between institutional growth and corporate environmental management practices.