The Crowding-Out Effect of Green Energy Innovation

Abstract

The U.S. government annually invests $700 million in the research and development of green energy. Yet, the question whether corporate research in green energy leads to increased corporate performance remains unanswered. Based on a sample of 130,000 patents granted by 212 U.S. firms between 1975 and 2006, this chapter tests and compares the impact of green and non-green energy innovation on firms’ financial performance and value. While innovation increases firm performance and value, we find that innovation in green energy has a significant and negative impact on future operating performance and reduces firm value. These results suggest that firms crowd out more profitable non-green projects for green innovation, thereby reducing their value and performance. We further find that investors understand this crowding-out effect of green innovation, as the market reacts negatively around and after the granting date of green energy patents.