The choice by a firm to improve its environmental performance is a result of both characteristics that distinguish firms from one another and the public policy that compels such action. This dissertation examines how policy outcomes and subsequent firm responses are contingent upon the capabilities of the firms to respond to such policy. I present a theory of compliance specificity that ties firms and regulators together based on the heterogeneity of capabilities that firms hold with regards to a pending public policy of variable stringency. I test this theory within the context of the regulation and investment of renewable power in the U.S. electric utility sector and the growth of a utility scale renewable energy industry. I have identified that firms are able to shape the stringency of an environmental policy in the electric utility sector as the heterogeneity among firms can impact the potential costs that a regulator would face in the case that a policy is set that would leave firms out-of-compliance. Further, the choices that firms make with regards to their use of renewable power is conditioned on the contingent relationships of the capabilities that they possess and these same policies that they have influence over. My theoretical approach and empirical analyses provides a more sophisticated depiction of the interrelationships between firms and regulators within this industry context.