Air pollution and firm performance: the role of innovation and happiness

PurposeThe detrimental effects of air pollution on the continuity of corporations attract more and more attention in the economic and financial studies. Prior literature investigates the impact of air pollution on corporate financial performance. This study aims to extend this research area by exploring the role of corporate innovation and happiness as factors that mitigate the adverse effects of air pollution and moderate the relationship between air pollution and financial performance.Design/methodology/approachThis study uses two-step system generalized method of moments models to analyze the data of 200 firms listed on Istanbul Stock Exchange over the period 2009-2022.FindingsThe results show that firms located in regions with higher air pollution are more likely to invest in innovation. In addition, firms that are more exposed to air pollution and have investments in research and development (R&D) have less ability to improve their financial performance compared to firms that have no investments in R&D. In a similar vein, although R&D has positive effect on financial performance, this effect diminishes in the presence of higher air pollution. The results also show that happiness has no significant moderating effect on the relationship between air pollution and financial performance.Practical implicationsThe findings of this study related to the role of corporate innovation in determining the effect of air pollution on financial performance indicate that the costs of investment in R&D weaken the firm's ability to mitigate the adverse impact of air pollution on financial performance, which provides important signals to policymakers to concentrate more on supporting investment in corporate innovation by providing the necessary facilities for firms to improve their innovative performance and decrease the costs of investment in innovation.Originality/valueTo the author's knowledge, this research is the first to explore the influence of happiness on the air pollution-financial performance relationship. In addition, this study differs from most prior ones by examining how responding to air pollution through investment in innovation can moderate the association between air pollution and financial performance.