The impact of environmental pollution liability insurance on firms’ Green innovations: evidence from China

Green innovation (GI) is crucial in promoting environmental sustainability, especially in the long run. Environmental pollution liability insurance (EPLI) facilitates firms better dealing with pollution-related risks, encouraging firms to invest in GI. This paper studies the impact of firms' EPLI coverage on GI using data from Chinese heavily polluting firms. Results show that EPLI promotes GI, both in terms of quantity and quality, and it has a persistent effect on innovations over the years. Further mechanisms study suggests that EPLI improves the cash flow conditions and reduces agency costs of the board, which explains the positive effect of EPLI on GI.