Does environmental innovation improve investment efficiency?

Using a sample of 12,550 firm-year observations for the US over the period 2009-2021, we empirically examine the impact of environmental innovation on firm-level investment efficiency. Using fixed-effect regressions, our results indicate that eco-innovation has a significant and positive impact on firm-level investment efficiency. We show that eco-innovation raises investment efficiency and reducing information asymmetry enhances this effect. In addition, we show that the impact of eco-innovation on investment efficiency is statistically significant at environmentally sensitive firms, unlike firms that are environmentally insensitive. Further, the impact is higher at firms with low leverage than at firms with high leverage, in terms of both magnitude and economic significance, and the relative significance of this relationship is more pronounced at large firms. Our results are robust to alternative measures of eco-innovation, endogeneity, and sample selection bias.