Ecological risk management: Effects of carbon risk on firm innovation investment

We investigate the impact of carbon risk on firms' innovation investments. Using a two-way fixed-effects panel regression with a panel dataset of Chinese listed firms for 2018–2021, we find that carbon risk inhibits firms' innovation investments. We also confirm the U-shaped relationship between carbon risk and innovation investment over the long term. We further reveal the conditioning roles of financial constraints, new investments, and carbon information disclosure at the firm level. Additionally, we find that firms' environmental awareness alleviates the impact of carbon risk on innovation investment. The results of this study have implications for firm managers, encouraging them to integrate carbon risk considerations when making the decision to promote firm innovation. •The impact of carbon risk on firms' innovation investments•Two-way fixed-effects panel regression•We find that carbon risk inhibits firms' innovation investments•We confirm a U-shaped relationship between carbon risk and innovation investment•Firms' environmental awareness alleviates the impact of carbon risk on innovation investment