Bridging the cultural gap: The impact of ethnic and gender homophily on environmental innovation

Abstract

This study explores the influence of ethnic and gender homophily among top management members on environmental innovation in firms using homophily theory. As environmental investment is gaining importance amid growing stakeholder demands for sustainability, it is often viewed as a costly effort that leads to perceptions of greenwashing. This study fills this gap by examining how the collective cultural homophily of top leaders affects a firm's environmental innovation. Analyzing 976 firm-year observations from Malaysian firms between 2016 and 2023, we find that higher levels of ethnic and gender homophily in top management correlate with increased environmental innovation. Homophilic leaders are more likely to leverage environmental teams and sustainability committees to enhance corporate environmental practices. Our findings also reveal that the impact of homophily varies based on the ethnicity and gender of external auditors, and is particularly significant in controversial industries. This study contributes to the understanding of homophily by demonstrating its critical role in shaping environmental strategies of firms. By highlighting the importance of cultural alignment among top managers, our study offers valuable insights into enhancing sustainability practices in corporate settings, benefiting both scholars and practitioners who aim to improve environmental performance.