Corporate governance and green innovation: international evidence

Abstract

Purpose This study aims to exploit Tobin’s Q model of investment to examine the relationship between corporate governance and green innovation. Design/methodology/approach The study is based on a sample of 3,896 firms from 2002 to 2021, covering 45 countries worldwide. The authors adopt Tobin’s Q model to conceptualize the relationship between corporate governance and investment in green research and development (R&D). The authors argue that agency costs and financial market frictions affect corporate investment and are fundamental factors in R&D activities. By limiting agency conflicts, effective governance favors efficiency, facilitates access to external financing and encourages green innovation. The authors analyzed the causal effect by using the system-generalized method of moments (system-GMM). Findings The results reveal that the better the corporate governance, the more the firm invests in green R&D. A 1%-point increase in the corporate governance ratings leads to an increase in green R&D expenses to the total asset ratio of about 0.77 percentage points. In addition, an increase in the score of each dimension (strategy, management and shareholder) of corporate governance results in an increase in the probability of green product innovation. Finally, green innovation is positively related to firm environmental performance, including emission reduction and resource use efficiency. Practical implications The findings provide implications to support managers and policymakers on how to improve sustainability through corporate governance. Governance mechanisms will help resolve agency problems and, in turn, encourage green innovation. Social implications Understanding the impact of corporate governance on green innovation may help firms combat climate change, a crucial societal concern. The present study helps achieve one of the precious UN’s sustainable development goals: Goal 13 on climate action. Originality/value This study goes beyond previous research by adopting Tobin’s Q model to examine the relationship between corporate governance and green R&D investment. Overall, the results suggest that effective corporate governance is necessary for environmental efficiency.