Quantity or quality: Environmental legislation and corporate green innovations

Firms investing in environmental issues often suffer from increased operating costs and reduced profits. Therefore, rigorous environmental legislation is required to motivate firms to conduct more green innovations. This paper takes the promulgation of China's New Environmental Protection Law as an ideal quasi-natural experiment to investigate the effect of rigorous environmental legislation on corporate green innovations. By reconsolidating the “compensation effect” and the “crowding-out effect”, we find that China's New Environmental Protection Law promotes the quantity of corporate green innovations, but inhibits the quality of green innovations. The potential mechanisms regarding green innovation quantity and quality are strikingly different. China's New Environmental Protection Law promotes green innovation quantity mainly through alleviating government favoritisms and increasing the risk of environmental litigations. However, since high-quality innovations require higher investment costs and greater tolerance for failure, China's New Environmental Protection Law also tightens financing constraints and exacerbates managerial myopia, which crowds out high-quality green innovations. Moreover, China's New Environmental Protection Law causes short-term corporate performance losses, but it indeed promotes environmental performances. Our results are crucial to comprehensively understand the effectiveness of environmental legislation and provide policy inspirations for the government concerning the environment.