Signaling role of finance in the relationship between environmental regulation and firm green innovation.

This paper investigates the signaling role of finance in shaping the relationship between China's New Environmental Protection Law (NEPL) and firm-level green innovation, drawing on the "Signaling View" framework. Leveraging the NEPL as a quasi-natural experiment and utilizing data from Chinese listed companies from 2010 to 2020, our findings reveal that firms significantly increased their green innovation post-NEPL. Firms, especially those in high-polluting industries, utilized green patents as strategic signals to demonstrate environmental responsibility, enhance reputation, and reduce financing costs. Green patent applications and acquisitions increased by 14.5 % and 15.7 %, respectively, in these sectors. The signaling effect is more substantial among larger firms and those with greater media exposure, highlighting the role of public scrutiny in motivating environmental compliance. Further analysis reveals broader benefits of green signaling, including improved media sentiment, higher ESG scores, and lower debt financing costs. Our findings emphasize the synergistic role of finance and policy in advancing green innovation through the signaling effect.