Does Green Technology Innovation Mitigate or Amplify the Financial Impact of Environmental Regulation? Evidence from Highly Regulated Industries in China

Abstract

This study examines the effect of environmental regulation on corporate financial performance and investigates whether green technology innovation moderates this relationship. Using an unbalanced panel of Chinese A-share listed firms in highly regulated industries from 2016 to 2024, we employ firm and year fixed-effects models with standard errors clustered at the firm level. The results show that environmental regulation has a significantly negative effect on return on assets, suggesting that compliance costs and resource constraints dominate potential innovation compensation effects in the short term. Green technology innovation is positively associated with financial performance; however, its interaction with environmental regulation is significantly negative, indicating that green technology innovation may amplify the short-term financial burden of environmental regulation. Further heterogeneity analysis shows that this negative effect is mainly concentrated among large firms. The results remain robust after replacing ROA with ROE, excluding observations from 2020, and conducting additional endogeneity checks. This study contributes to the literature by showing that green technology innovation does not necessarily buffer regulatory pressure in the short term, but may instead intensify firms’ financial burden when compliance and innovation costs overlap.