Green Innovation and the Cost of Equity: Evidence from China

Abstract

Purpose
This paper aims to examine the association between green innovation and the cost of equity in China. This study relies on the investors’ base perspective and shareholders’ perceived risk perspective to investigate the relation between green innovation and the cost of equity in China.

Design/methodology/approach
The paper uses firm-fixed effect regression for a sample of Chinese public companies for the period 2008–2018.

Findings
The authors find a negative relationship between green innovation and the cost of equity capital. This negative association is found to be more pronounced for less financially constrained firms, during periods of high economic policy uncertainty, and for firms with a strong internal control environment. Finally, the paper shows that the negative association became more pronounced after the passage of the Environmental Protection Law of China in 2012. The results remain robust to possible endogeneity concerns.

Originality/value
This study contributes to the green innovation literature by documenting that shareholders favorably view firms implementing green innovation policies. The study also has policy implications for Chinese regulators in improving the green credit policy.

Keywords: Green innovation, Cost of equity, Environmental protection, Financial constraint

JEL Classification: G12, G30, O30