Exploring the impact of environmental regulations and green innovation on corporate investment and cash management: evidence from Asian economies

Abstract

Purpose

This study explores the complex interaction of environmental policies on corporate cash and capital investment decisions.

Design/methodology/approach

The study utilizes a 10-year dataset from 2010 to 2019, comprising publicly listed firms from 10 prominent Asian countries. The analysis was conducted by employing the System GMM.

Findings

The regression has revealed that most of the business investments are negatively affected by environmental regulation (ENR), while green innovation (GNI) is positively significant to investments. Moreover, we indicated that ENR raises the cash balance, while GNI tends to reduce it. There was a strong negative correlation found between cash reserves and investment; this implies a crowding-out effect: excess liquidity dilutes the propensity for capital expenditure. The findings emphasized cash balances as a moderator in the relationship between environmental policies and investments. More specifically, maintaining greater cash reserves is an insulating mechanism against the otherwise damaging impact of stringent ENR on corporate investment decisions and a protective measure for financial soundness against external environmental stress.

Practical implications

It is especially important considering the heterogeneous effects obtained across high-income, upper-middle-income and lower-middle-income countries, responding differentially to environmental policies. The results show support for a balanced integration of fiscal incentives, subsidies or tax credits, especially in lower-middle-income countries, to promote sustainable practices without imposing prohibitive compliance costs.

Originality/value

The current analysis supplements the new insights regarding the transformation channel of environmental policies into industrial investment and how cash holdings diversify this channel.

Citation

Farooq, U., Thavorn, J. and Tabash, M.I. (2024), "Exploring the impact of environmental regulations and green innovation on corporate investment and cash management: evidence from Asian economies", China Finance Review International, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/CFRI-06-2024-0337