CEO Pay Caps, Political Promotion Incentives, and Green Innovation: Evidence from Chinese Publicly Listed Firms

Based on the Chinese government’s regulation that imposes a pay cap on the CEOs of state-owned enterprises (SOEs), we investigated how a change in institutional conditions affects firms’ green innovation. Drawing on the career concern theory, we suggest that political promotion incentives are likely to substitute for monetary incentives and influence these CEOs’ decisions and actions because the regulation reduces not only their current but also their future monetary incentives. Given that Chinese governments strongly encourage SOEs to engage in green innovation to solve environmental problems, CEOs who are more successful in this respect can demonstrate a higher level of alignment with government objectives and thus have better chances of political promotion. Therefore, we hypothesized that CEOs of SOEs generate more green innovation than CEOs of privately owned firms. We further argued that the positive relationship between the pay cap regulation and SOE green innovation is stronger in the case of CEOs with political connections and weaker in the case of younger CEOs and CEOs of firms in more munificent industries. Difference-in-difference analyses of a panel dataset including 11,061 firm–year observations of 1549 firms provide support for our hypotheses. Our study contributes to the literature on why and how institutional conditions affect firms’ green innovation. Moreover, our results imply the huge potential of the government in encouraging SOEs to promote green technology development, considering the critical incentivizing role of the political promotion concern of CEOs of SOEs.