Environmental Penalties, Internal and External Governance, and Green Innovation: Does the Deterrence Effect Work?

Abstract

There is a clear target and roadmap for the peaking of carbon emissions and achievement of carbon neutrality, and prior to this target being reached, penalties have been formulated to supervise enterprises and prompt green innovation. This study aimed to investigate the transmission mechanism between environmental penalties and green innovation using an empirical econometrical model and two sets of samples—punished firms and heavily polluting listed firms—amounting to 520 punished firms and 6043 firm-year observations. The main conclusions were threefold. Firstly, regarding the panel data, of the three parameters, namely, the times of penalties, the number of penalty fines, and the intensity of the penalty, only the number of penalty fines were statistically significant in terms of green innovation, indicating that only the hypothesis that, the higher the number of environmental penalties, the greater the green innovation that could be supported. Secondly, from a longitudinal perspective, there was one spontaneous effect on green patents, but the effect faded quickly in the second year after the punishment, indicating that firms did not seek green innovation as the solution for environmental penalties from a long-term perspective. Thirdly, the case number of external penalties in a province was significantly statistically associated with green innovation under an intertwined effect of the actual controller and shareholders. Therefore, there was a spillover of the deterrence effect from external penalties, with a higher number of penalty cases in a province corresponding to greater green innovation but with a very subtle coefficient. In addition, taking the median as the benchmark for group division, the group smaller than the median was statistically significant, while the group with a higher number of external penalties was not statistically significant, suggesting that firms were used to the penalties issued by environmental authorities.