Does green innovation affect firm misvaluation? Evidence from environmentally sensitive firms

Abstract

This study examines how equity markets price green innovation and whether its valuation effects vary according to firms’ initial valuation status and direct consumer exposure. The study uses an unbalanced panel comprising 2,075 firm-year observations for 152 environmentally sensitive firms across 35 countries from 2002 to 2021. Firm fixed-effects models are employed to examine the association between green innovation and firms’ market-to-intrinsic value ratios, while two-stage least squares estimation is used to assess the robustness of the findings. Green innovation is positively associated with the market-to-intrinsic value ratio. For initially undervalued firms, it narrows the gap between market and intrinsic value, thereby partially correcting undervaluation. For initially overvalued firms, it widens this gap, thereby amplifying overvaluation. The positive association is stronger among overvalued firms and firms with direct consumer exposure. The results remain robust to two-stage least squares estimation. This study shifts attention from whether green innovation creates firm value to how equity markets price that value. It shows that green innovation acts as a favorable but difficult-to-value signal whose pricing consequences depend on firms’ initial valuation status. The same signal can partially correct undervaluation while pushing overvalued firms further away from their fundamentals. The study also identifies direct consumer exposure as an important boundary condition that strengthens the market’s valuation response to green innovation.