Waiting or Acting: The Effects of Environmental Regulatory Uncertainty on Green Innovation

This paper investigates how environmental regulatory uncertainty affects green innovation in polluting firms. The findings suggest that, instead of adopting a passive “wait-and-see” strategy, polluting firms proactively engage in green innovation and R&D activities. To address endogeneity, I employ an instrumental variable approach using political polarization in roll-call votes on environmental and climate issues in the U.S. House of Representatives. I also exploit the proposal of the Affordable Clean Energy rule in 2018 as an exogenous shock in a difference-in-differences framework. The results are consistent with the growth options view of green innovation in polluting firms. Additional evidence suggests that environmental regulatory uncertainty leads to reductions in toxic emissions. This paper was accepted by Camelia Kuhnen, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.06051 .