Unintended consequences of punishment: Adverse effects of environmental penalties on green patents

We find that manufacturing firms that have received high environmental penalties experience significant declines in subsequent green patenting activity. We further use a difference-in-differences strategy exploiting the passage of 1990 Clean Air Act Amendment (1990 CAAA) as a shock to environmental regulatory stringency and show that the increase in regulatory stringency is linked to decreases in corporate green innovation. The adverse effect of environmental penalties on green innovation is stronger in firms with greater business uncertainty, higher product market competition, higher institutional ownership, and weaker financial conditions. Overall, the empirical evidence is consistent with the view that environmental penalties prompt firms to manage their risk exposure by reducing green innovation activity. [Display omitted] •Environmental penalties can suppress firms’ green patenting activity.•A quasi-natural experiment shows expected environmental penalties reduce green innovation.•The effect is linked to business uncertainty, market competition, institutional ownership and financial conditions.