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Do environmental penalties matter to corporate innovation?

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  • Guedhami, Omrane
  • Pan, Yue
  • Saadi, Samir
  • Zhao, Daxuan

Abstract

Environmental penalties play a crucial role in enforcing corporate environmental compliance and performance. In this paper, we examine whether and how government environmental violation penalties influence corporate innovation. Using a large sample of Chinese-listed firms, we find that firms subjected to environmental penalties tend to reduce their investment in R&D, resulting in a reduction in both patent applications and granted patents. These adverse effects intensify with the severity of the penalties and contribute to raising the cost of capital for penalized firms. However, our analysis also reveals that the number of green patent applications tends to increase post-penalty imposition. These results indicate that companies that are subject to environmental penalties may shift their long-term investment strategy from general innovation towards environmental initiatives.

Suggested Citation

  • Guedhami, Omrane & Pan, Yue & Saadi, Samir & Zhao, Daxuan, 2025. "Do environmental penalties matter to corporate innovation?," Energy Economics, Elsevier, vol. 141(C).
    • Handle: RePEc:eee:eneeco:v:141:y:2025:i:c:s0140988324007734
    DOI: 10.1016/j.eneco.2024.108064
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    More about this item

    Keywords

    Environmental Penalty; Innovation; Patent; Investment; Cost of Capital; China;
    All these keywords.

    JEL classification:

    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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