How Financial Performance Aspirations Influence Environmental Investment Decisions

Sustainability has become a major theme in operations management literature due to the evident detrimental environmental impacts of operation-related activities. Many studies implicitly assume managers engage rationally in environmental initiatives with clear performance outcomes in mind. This article explores a largely overlooked perspective, building on the Behavioral Theory of the Firm (BTOF). We examine whether environmental investment decisions have behavioral elements in which firms mimic high-performing peers. We analyze data from 228 S&P Global 1200 index firms from 2013 to 2018. We find that firms with a negative attainment discrepancy between financial performance and their performance aspirations converge environmental investments to those of high-performing peers. These effects are stronger when firms have previously overinvested compared to high-performing peers, resulting in a decreased investment. Results indicate that these firms are more likely to converge their investments in internal (corporate) rather than external (supply chain) environmental initiatives. Conversely, the investments of firms outperforming their aspirations diverge from those of their high-performing peers, in terms of external environmental initiatives. Our findings support some predictions of the BTOF but also extend this theory by showing that, in the context of investing in environmental programs to improve operations, social aspirations function differently from historical aspirations.