Abstract
We examine the impact of the de-localization of environmental governance on corporate innovation structure by analyzing the vertical reform in environmental governance (VREG), which transfers grassroots environmental management authority from local to provincial governments in China. We find that the VREG alters corporate innovation structure, particularly by boosting green innovation and crowding out non-green innovation. Channel analyses reveal that the VREG significantly strengthens environmental enforcement, increases environmental subsidies, and reduces environmental agency costs, asymmetrically influencing green and non-green innovation. Cross-sectional analyses indicate that the effect of the VREG on corporate innovation structure is more pronounced in firms located in regions with lower administrative levels and weaker environmental regulation, firms in pollution-intensive industries, and firms with better green credit support. Overall, our study highlights the significance of environmental governance independence and emphasizes the crucial role of the environmental management system in shaping firms’ innovation decisions.
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