How Do Corporate Financial Asset Holdings Affect Green Innovation? Evidence from China

Abstract

This paper investigates the impact of corporate financial asset holdings on green innovation and explores the internal mechanisms through which financialization shapes firms’ sustainability-oriented technological strategies. Using a comprehensive panel dataset of Chinese A-share non-financial firms from 2010 to 2023, the analysis confirms that corporate financialization significantly inhibits green innovation, supporting the crowding-out hypothesis. Mechanism tests reveal three economic channels: reduced innovation capability (measured by R&D staffing), diminished innovation willingness (proxied by environmental investment), and a deteriorated innovation environment (captured through financial constraints). Heterogeneity analysis further shows that this negative effect is particularly pronounced among non-state-owned enterprises, firms operating in low-pollution industries, and those facing high market competition. These findings highlight how financialized capital allocation undermines long-term sustainable investment, especially where institutional protections are weak or absent. The study offers important policy implications for regulating excessive financialization, enhancing green financing mechanisms, and designing targeted incentives to foster sustainability-driven innovation across different industry and ownership structures.