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Digital transformation, employee and executive compensation, and sustained green innovation

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  • Liu, Meihan
  • Zhao, Jingjie
  • Liu, Hongtao

Abstract

While digital transformation offers potential environmental benefits, understanding how organizations effectively convert digital capabilities into sustained green innovation remains a critical challenge. Current research overlooks the role of organizational incentives in this transformation, particularly how compensation structures at different hierarchical levels might enhance or inhibit environmental innovation outcomes. This study examines how employee and executive compensation shapes digital transformation's impact on sustained green innovation capacity. Analyzing panel data from 27,658 firm-year observations of Chinese listed companies (2007–2022) through fixed-effects regression and instrumental variable approaches, we find that digital transformation significantly enhances environmental innovation capacity, with this effect strengthened by both employee and executive compensation. Our heterogeneity analysis reveals that these relationships vary systematically across organizational contexts - showing stronger effects in non-state enterprises, high-tech sectors, and economically developed regions. Beyond establishing compensation's crucial role in environmental innovation, these findings advance digital sustainability theory by demonstrating how organizational incentives and institutional contexts jointly shape the translation of digital capabilities into environmental improvements. This understanding provides a foundation for developing more effective approaches to leveraging digital transformation for sustainable development.

Suggested Citation

  • Liu, Meihan & Zhao, Jingjie & Liu, Hongtao, 2025. "Digital transformation, employee and executive compensation, and sustained green innovation," International Review of Financial Analysis, Elsevier, vol. 97(C).
    • Handle: RePEc:eee:finana:v:97:y:2025:i:c:s1057521924008056
    DOI: 10.1016/j.irfa.2024.103873
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    More about this item

    Keywords

    Digital capabilities; Environmental innovation; Compensation structure; Organizational incentives; Institutional context;
    All these keywords.

    JEL classification:

    • 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
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • M15 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - IT Management

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