Punishment or Catalyst? The Role of Environmental Fines in Driving Corporate Environmental Innovation in the Frankfurt Stock Exchange. The Moderating Role of Financial Slack, Firm Size, and Board Environmental Expertise

ABSTRACT Environmental fines function as regulatory instruments that compel firms to adopt innovative approaches to environmental protection. This fosters more efficient industrial processes, strengthens sustainability practices, and stimulates competition as regulatory frameworks evolve. Whereas some corporations perceive such fines merely as punitive measures, others regard them as catalysts for innovation. However, the relationship between environmental fines and innovation, as well as the moderating roles of financial slack, firm size, and board environmental expertise, remains underexplored in the literature. This study addresses these gaps by drawing on Porter's hypothesis and focusing on nonfinancial entities listed on the Frankfurt Stock Exchange. Using purposive sampling, data were collected from 347 firms covering the period 2008–2024 through the Bloomberg database. To address cross‐sectional dependence, slope heterogeneity, and endogeneity, the study employed advanced estimation techniques, including the two‐step generalized method of moments, fixed effects with Driscoll–Kraay standard errors, and the Common Correlated Effects Mean Group estimator. The results indicate a significant positive relationship between environmental fines and environmental innovation. Furthermore, financial slack, firm size, and board environmental expertise were found to significantly and positively moderate this relationship. These findings offer important insights for corporations, highlighting that compliance with environmental fines can stimulate innovation, strengthen sustainability initiatives, optimize operational efficiency, and create long‐term value.