Regulation-induced financial constraints, carbon emission and corporate innovation: Evidence from China

Prior literature documents that in developed economies, tighter environmental standards may induce higher firm innovations. In contrast, using China's firm-level CO(2 )emissions data, this paper finds that firms with higher CO2 emissions are associated with lower corporate innovation. A 1% increase in carbon emissions reduces research and development (R&D) expenditures by about 4.3% to 6.3%, having controlled for endogeneity concerns. While technical and commercial uncertainty of innovation can deter high carbon-emitting firms from investing in R&D, we find that high carbon-emitting firms are financially constrained when faced with exorbitant pollution-related expenses. Instead, such firms acquire firms with green assets and purchase low-polluting target assets to mitigate environmental pollution. The results are more pronounced in firms with poor corporate governance, resource -constrained non-SOEs, and highly polluting firms. Our results remain robust for different measures of R&D expenditures, green R&D and different components of carbon emissions.

Automated summary

Previous studies have shown that tighter environmental standards in developed economies may stimulate firm innovations, but in China, firms with higher CO2 emissions are associated with lower corporate innovation. High carbon-emitting firms face financial constraints when confronted with excessive pollution-related expenses and therefore mitigate environmental pollution by acquiring firms with green assets and purchasing low-polluting target assets. This result is particularly pronounced in firms with poor corporate governance, resource-constrained non-SOEs, and highly polluting firms.