Firms’ stigmatization due to deviation from social norms has received extensive attention in recent years. The increasing significance of the social norm requiring firms to protect the natural environment contributes to the emergence of pollution stigma over the heavily polluting firms. We apply the stigma theory to the National Specially Monitored firms of China and expand past research by developing a framework to understand the interactive effects of external stakeholder’s pressure on the tendency for these firms to disengage from the pollution stigma. We find that (a) there is diminishing returns to scale in the joint effect between hard and soft regulative pressure and in that between regulative and normative pressure, (b) the positive effect of mimetic pressure from environmental protection exemplary firms is exacerbated when dilution of stigma responsibility is low, and (c) dilution of stigma responsibility weakens the positive effect of stigma intensity on firms’ disengagement tendencies.

This study delves into investors’ perceptions of the polluting label attached to listed manufacturing firms, emphasizing the interplay between external political ties and internal green innovative capability in influencing these perceptions. Drawing on a longitudinal analysis of listed manufacturing firms in China from 2010 to 2020 and employing a difference-in-differences (DID) approach, we treat firms identified under the National Specially Monitored (NSM) program as the treated group, while non-NSM firms form the control group. The time variable captures the period post the introduction of the NSM program. Our findings highlight that the polluting label created a loss prospect for investors, signifying diminishing returns over time. Interestingly, firms with closer connections to local governments experienced amplified negative investor perceptions. In contrast, strong affiliations with the central government and robust green innovative capabilities cushioned these adverse reactions. Notably, central ties proved even more beneficial when complemented by green innovative capability. By melding signal theory with the literature on sense-making, this research adds nuance to the discourse on the role of resources in determining firm success amidst environmental controversies.