Can the penalty mechanism of mandatory environmental regulations promote green innovation? Evidence from China's enterprise data

There is no consensus regarding the impact of mandatory environmental regulations on corporate green innovation. This study explains the divergent conclusions by differentiating between the deterrence mechanism and penalty mechanism of such regulations. Using China's enterprise data from 2010 to 2020, this paper employs the multiple fixed effect panel data model to examine the green innovation behavior of punished enterprises. The findings reveal a significant reduction in both the quantity and quality of corporate green innovation due to environmental penalties. Specifically, the negative impact is observed in the quantity of green innovation associated with end-of-pipe governance and the quality of green innovation related to source control. These results are robust and withstand various robustness tests. Mechanism analysis indicates that environmental penalties do not lead to increased environmental investment or non-green innovations. Heterogeneity analysis demonstrates that adequate financial resources can help companies mitigate the adverse consequences of environmental penalties. This research contributes to understanding the mechanism through which mandatory environmental regulations influence green innovation and offers valuable insights for decision-making towards environmentally friendly economic development.