When lenders go green, do borrowers follow? Evidence from the response of corporate green innovation to bank's sustainability commitments

Abstract

Using a sample of A-share listed companies in China from 2014 to 2023, this paper studies how corporate green innovation changes when firms experience an exogenous shock from their lending banks signing sustainable banking principles between 2017 and 2021. We employ the staggered difference-in-difference approach to explore the impact of this new sustainability commitment on corporate green innovation. We find that firms significantly increase their green innovation after their lending banks become “green banks”, and the innovation translates into real environmental performance. The response is more pronounced in more financially constrained firms, in lower-technology firms, in firms with weaker corporate environmental management, and in firms facing less stringent government environmental regulation. Additionally, the effect intensifies with greater bank monitoring capacity. These findings contribute to our understanding of bank monitoring mechanisms, sustainable finance development, and the drivers of corporate environmental practices.