Green innovation under financial and policy uncertainty: Evidence from China

This study examines the effect of idiosyncratic risk on the green innovation of A-share listed companies in China from 2010-2021, using idiosyncratic risk as a proxy for financial risk. Results indicate that idiosyncratic risk adversely affects a firm’s green innovation, which is negatively mod- erated by heightened economic policy uncertainty (EPU), highlighting that firms tend to defer or halt green innovation investments under high EPU, appreciating the ’real option’ value of a deci- sion to ‘wait-and-see’. Further, policy determinant analysis reveals that the negative moderation originates from trade-related policy uncertainties. Heterogeneity analysis reveals that the primary findings are more pronounced in non-SOEs and those companies determined to be larger, older, and more leveraged firms with elevated ESG performance. Findings are found to be robust across several various econometric approaches. This research contributes to the literature on corporate green innovation by analysing the moderating role of EPU and providing insights for managers, investors, and policymakers. Explores the impact of firm-specific idiosyncratic risks on green innovation in Chinese A-share listed companies from 2010-2021. Finds a significant negative relationship between idiosyncratic risk and green innovation, indicating that higher firm-specific risks dampen innovation efforts. Economic Policy Uncertainty (EPU) exacerbates the negative effects of idiosyncratic risks on green innovation, especially in SOEs, large firms, and those with high leverage. Highlights the "real option" effect of delaying green innovation amid financial and policy uncertainty, while recognizing potential long-term benefits for early innovators. Provides valuable policy insights for supporting green innovation under uncertainty, emphasizing the need for stable regulatory environments and targeted financial support.