Green innovation and corporate default risk

Abstract

We investigate the impact of green innovation on default risk for the period 2003–2020. Using 15,015 firm-year observations from 2301 unique U.S. firms and a firm-fixed effects regression model, we find that firms with higher green-innovation experience lower default risk as measured by the distance-to-default, probability of default, and CDS spreads. We find robust evidence addressing potential endogeneity in the association between green innovation and default risk by applying three different approaches: the propensity score matching approach, the instrumental variable approach, and the difference-in-differences technique. Our channel analysis results show that high green innovation reduces cashflow volatility and managerial risk-taking, which translates into lower default risk. The influence of green innovation on default risks is contingent on various firm characteristics. It is more pronounced in firms with greater institutional ownership, a younger age, and more carbon-intensive operations.