This study examines the underexplored possibility that the public disclosure of stakeholder mistreatment—in particular, employee mistreatment—may lead to increased innovation activities in firms, underscoring the importance of firm size as a critical contingency to this effect. While the extant literature highlighting the significance of stakeholders as key resource providers suggests the negative impact of stakeholder mistreatment disclosure on firms’ ability to innovate, our study spotlights its potential positive effect on firms’ motivation to innovate and theorizes that the latter effect may dominate the former effect in case of large firms, compared to small firms. Using a Regression Discontinuity design based on inspections of Occupational Safety and Health Administration, we find strong support for our theory. These findings contribute to our knowledge about the strategic implication of stakeholder mistreatment, drivers of firm innovation and its competitive dynamics, highlighting a nuanced and complicated effect of employee mistreatment on firm performance.
