Can Mandatory Governance Mechanism Promote Corporate Green Innovation—Evidence From Internal Audit

ABSTRACT Green innovation is a vital strategy for firms to achieve sustainable development goals and a key component of national sustainable development agendas. Green innovation is influenced by the corporate governance mechanism. Internal audit, as a mandatory system, plays a critical role in improving corporate governance and, as a result, is crucial for enhancing corporate green innovation. This study collects and analyses data on internal audit practices from Chinese listed companies between 2007 and 2022 to examine how internal audit influences corporate green innovation. The results show that (1) internal audit significantly enhances green innovation, with findings remaining robust after various robustness and endogeneity tests. (2) Mechanism analysis indicates that internal audit enhances firms' green innovation by strengthening executives' environmental background, increasing firms' risk‐taking capacity and curbing financialization. These three mechanisms, respectively, reflect firms' strategic choices, risk assessment and resource allocation. (3) Heterogeneity analysis shows that internal audits have a stronger impact on green innovation in firms with high internal control quality, nonstate‐owned enterprises, high‐tech firms and those with greater analyst attention. This study contributes to the theoretical understanding of the role of internal audit in green innovation and provides insights for Chinese regulators to assess, guide and improve internal audit practices in promoting sustainability.