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Do financial constraints hinder or spur green innovation?

Author

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  • Nguyen, Quang Minh Nhi
  • Do, Trung K.

Abstract

This paper examines how debt and equity financing constraints differently affect firms’ environmental innovation. Using machine learning–based measures of financial constraints and a panel of U.S. firms from 1985 to 2017, we find that debt constraints hinder green innovation, reflecting creditors’ preference for low-risk, tangible investments. In contrast, equity constraints are associated with increased green patenting, possibly as firms aim to attract sustainability-oriented investors. These results are robust to various alternative measures and identification strategies. Overall, our findings underscore the distinct and contrasting impacts of debt and equity constraints on corporate engagement in environmental innovation.

Suggested Citation

  • Nguyen, Quang Minh Nhi & Do, Trung K., 2025. "Do financial constraints hinder or spur green innovation?," Economics Letters, Elsevier, vol. 257(C).
    • Handle: RePEc:eee:ecolet:v:257:y:2025:i:c:s0165176525005257
    DOI: 10.1016/j.econlet.2025.112688
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    Keywords

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    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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