Green technology innovation with environmental constraints

Pengfei Luo, Yingxian Tan, Jinqiang Yang and Yanming Yao

Quantitative Finance, 2025, vol. 25, issue 6, 959-971

Abstract: In this paper, we employ the real-option approach to investigate the impact of environmental constraints (regulations) on a firm's green technology innovation investment decisions. We discover that the relationship between the timing of green technology innovation and the intensity of environmental constraints follows a U-shaped pattern, which provides a potential explanation for the conflicting predictions on the relationship between green technology innovation and environmental constraints in the empirical findings. Critically, our findings suggest that there is an optimal level of environmental constraints, which can be chosen by the government to encourage firms to undertake green technology innovation investments sooner. Furthermore, we find that the optimal environmental constraints first loosen and then tighten as business risk increases.

Date: 2025
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DOI: 10.1080/14697688.2025.2506778

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