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This study examines the relationship between environmental innovation and firm valuation between 2019 and 2023, within a broader framework that includes governance and macroeconomic variables. This study employs Bayesian model averaging and random forest methodologies to analyse how environmental innovation impacts the market value of European companies in the industrial and information technology (IT) sectors, taking into account firms’ existing performance levels. The findings reveal significant differences in the factors driving valuation in the two sectors: environmental product scores positively influence market value for overvalued industrial companies, and profitability is the primary determinant of value for IT firms. There are distinct patterns between overvalued and undervalued companies in both sectors. Financial leverage and governance quality are more important for undervalued firms in the industrial sector; market risk plays a bigger role for their counterparts in the IT sector. Environmental variables are only moderately important determinants of value when compared to financial metrics, but their influence varies by firm sector and performance. These results empirically demonstrate that the relationship between environmental innovation and financial value is highly context-dependent. For corporate managers, the findings suggest that a sector-specific and performance-targeted approach to environmental innovation is required. For policymakers, they suggest regulatory frameworks should be tailored to economic sectors and support environmental innovation by firms in the short run before expecting long-term benefits.
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