Do Production Frictions Affect the Impact of Sustainable Investing?

Cynthia Yin
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Cynthia Yin: Ohio State U

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Prior studies focus on how investors' sustainability preferences incentivize firms to reallocate resources from dirty to clean physical capital. However, the impact of investors' preferences on capital allocation depends critically on whether clean capital and dirty capital are substitutable. I develop a novel empirical strategy showing that dirty capital and clean capital are highly complementary. Theoretically, I explore firms' investment decisions, assuming that investors dislike carbon emissions through both risk and nonpecuniary utility channels. Given the current level of complementarity, investors' preferences have a limited impact on investment decisions, underscoring the need for technological innovation to address this production friction.

JEL-codes: C61 G11 G32 L21 (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-cfn
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2024-25

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