Adjusted air pollution exposure and corporate innovation investment: Evidence from China

Jie Liu, Jing Chi, M. Humayun Kabir and Bilal Hafeez

International Review of Finance, 2025, vol. 25, issue 2

Abstract: Using a novel measure of air pollution exposure adjusted for the heterogeneity of exposures and the extent of local air pollution, we find a significant negative relationship between adjusted air pollution exposure and corporate innovation investment. This finding still holds after controlling for endogeneity and conducting a series of robustness tests. While the relationship is mediated through net operating cash flows and debt financing costs, we also find that firms with high adjusted air pollution exposure might have deteriorated productivity of R&D personnel, which ultimately hinders innovation input and output. However, state ownership appears to mitigate this adverse effect of adjusted air pollution exposure. Furthermore, the adverse effects of air pollution exposure on innovation investment are more pronounced among firms that disclose environmental information, exhibit low managerial risk tolerance, operate in non‐polluting industries, or are located in developed and less polluted regions. Additionally, the negative impact is particularly evident in the subsample of firms after the signing of the 2015 Paris Agreement. This study sheds light on the importance of adjusted air pollution exposure and its influence on corporate investment in China.

Date: 2025
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