Abstract This paper introduces a moderated‐mediation model to investigate the relationship between green innovation, as measured by green patent stocks, and firms' stock market value, as measured by Tobin's Q. Using longitudinal data drawn from 351 heavily polluting firms in China's A‐share market from 2007 to 2018, we find that green innovation is likely to affect firms' stock market value positively. A 1% increase in the green innovation over assets index will enhance by 0.18% the Tobin's Q at the firm level. Environmental compliance costs significantly mediate the green innovation‐firms' stock market value association by 8.5%. We also emphasize the positive moderating role of technological collaboration with public research organizations on green innovation‐environmental compliance costs linkage. Our results emphasize that the recurrent question in the extant literature “does it pay to be green?” should be substituted by “how and under what conditions does it pay to be green for firms?” and further stress how firms obtain sustainable development in the environment and economy through green innovation. Implications for firms and investors are also proposed.