Green finance mismatch and innovation efficiency

This study introduces the concept of green finance mismatch to explain why expanding financing supply does not always foster innovation. We develop a macro–micro matching framework linking financial-system structures with firm-level capital needs, and test it using Chinese provincial panel data from 2010–2021. The results reveal that when financing supply and firm demand are aligned—especially through moderate equity financing—green innovation efficiency improves significantly. However, when misaligned, expansion of direct or excessive equity finance imposes mismatch costs that suppress innovation, yielding a non-linear inverted-U effect. Mechanism analysis shows that efficiency gains, governance engagement, and environmental responsibility (the E³ pathway) drive the benefits of alignment, while ecological quality and fiscal support mitigate mismatch penalties by shifting the equity–efficiency frontier upward. These findings challenge the conventional belief that scaling up green finance is inherently beneficial, and instead highlight the central role of structural matching versus mismatch in determining its innovation impact.