Journal of Environmental Management 387 (2025) 125869

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Journal of Environmental Management

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Research article

Can financial flexibility enhance corporate green innovation performance?

Evidence from an ESG approach in China
Shenglin Ma a , Andrea Appolloni b,*
a
School of Economics and Management, North University of China, Taiyuan, 030051, China
b
Department of Management and Law, University of Rome Tor Vergata, Rome, 00133, Italy

A R T I C L E I N F O A B S T R A C T

Keywords: This paper empirically explores whether financial flexibility significantly affects corporate green innovation
Financial flexibility performance (CGIP), and by what means? What factors moderate the relationship between financial flexibility
Green innovation performance and CGIP? Are there differences across different types of firms, regions and industries? This study demonstrates
Risk-taking
that financial flexibility significantly enhances CGIP. Financial flexibility primarily facilitates green innovation
Non-efficiency investment
by reducing corporate risk-taking and increasing non-efficiency investments. ESG performance negatively
ESG performance
Market competitiveness moderates the connection between financial flexibility and CGIP, while market competitiveness exerts a positive
moderating effect on this relationship. The impact of financial flexibility on CGIP is more pronounced for non-
state-owned enterprises, companies in eastern China, and those in high-tech industries. Further analysis reveals
that, compared to debt flexibility, cash flexibility has a more significant effect on improving CGIP. This study
offers theoretical guidance and practical insights to enhance CGIP.

1. Introduction investment expenditure levels, and their investment spending improved

financial performance in subsequent years. These empirical findings
Financial flexibility is a comprehensive capability that enables firms indicate that financially flexible firms are better able to withstand
to proactively adapt to dynamic environmental changes (Rehman and external shocks. Their risk-defence capabilities are markedly superior to
Jajja, 2023), manage systemic uncertainties, control financial risks, those of non-financially flexible firms, and their performance during
integrate resources (Naseer et al., 2024), and optimise financial crises is particularly outstanding.
decision-making pathways, thereby maximising firm value (DeAngelo Innovation performance not only influences the quality of economic
et al., 2018). During the Asian financial crisis in 1997 and the US sub­ development in China but also positions enhancing CGIP as one of the
prime mortgage crisis in 2008, many firms went bankrupt due to main operational goals for enterprises (Ma et al., 2025a; Wu et al.,
insolvency. However, some firms not only avoided bankruptcy but also 2024). However, there are substantial disparities in innovation perfor­
capitalised on the opportunities presented by the crises. These firms mance among companies. Chinese corporate green innovation embodies
acquired near-bankrupt but high-growth potential companies at low dual attributes of being both green and innovative, characterized by
prices, thereby reaping substantial profits. This phenomenon has high capital requirements, lengthy R&D cycles, adjustment costs, sig­
sparked extensive and in-depth reflection among scholars. Arsla­ nificant uncertainty, and unclear profit conversion rates (Shi et al.,
n-Ayaydin et al. (2014) found that high financial flexibility among 2023; Wen et al., 2025). In 2023, the overall R&D expenditure of
non-financial firms in Southeast Asia during the Asian financial crisis A-share listed companies in China reached 1.82 trillions yuan, ac­
helped them avoid difficulties and better grasp investment opportu­ counting for 2.51 % of total operating revenue (Ma et al., 2025b).
nities. Similarly, Gregory (2020), using the US subprime mortgage crisis Amidst increasing complexity and uncertainty in the external environ­
as a backdrop, compared the investment behaviours of financially ment, Chinese enterprises are increasingly driven to explore sustainable
flexible and non-financially flexible firms in emerging countries. The innovation pathways and enhance their innovation performance (Wang
study revealed that financially flexible firms experienced less severe et al., 2024). The academic community has long been concerned with
financing constraints during the crisis, had significantly higher corporate innovation performance. Current research in this area

* Corresponding author.
E-mail addresses: [email protected] (S. Ma), [email protected] (A. Appolloni).

https://doi.org/10.1016/j.jenvman.2025.125869
Received 31 December 2024; Received in revised form 15 May 2025; Accepted 17 May 2025
Available online 21 May 2025
0301-4797/© 2025 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-
nc-nd/4.0/).
S. Ma and A. Appolloni Journal of Environmental Management 387 (2025) 125869

primarily focuses on two aspects. First, studies have examined the company’s financial allocation are heightened, with adequate funding
smoothing mechanisms of innovation investment through factors such being crucial for enhancing CGIP (Zou et al., 2024). Financial flexibility
as bank loans, organisational slack, and corporate savings (Guo and has played a significant role in the adjustment of corporate business
Liang, 2016). Second, research has explored the explanatory power of strategies. So, what impact does financial flexibility have on CGIP? On
factors such as intellectual property rights protection, the legal envi­ the one hand, firms can avoid the impact of external environments,
ronment, and entrepreneurial spirit on innovation activities (Jee and reduce financing costs, and seize future favourable investment oppor­
Sohn, 2023). tunities by holding ample cash and retaining residual debt capacity. On
The core competence theory of the firm posits that the knowledge the other hand, a high level of cash reserves may lead to ineffective
and unique capabilities accumulated by a firm during its growth in a investment and waste of financial resources, resulting in high holding
specific environment form the basis of its competitive advantage (Liang, costs and difficulties in management coordination. Blindly pursuing low
2023). Thus, in addition to improving external conditions, firms should leverage can also affect the contingent governance role of debt. There­
proactively enhance their internal environment when participating in fore, financial flexibility may be a “double-edged sword”. It may not
innovation activities (Pundziene et al., 2022). Under the constraints of have a simple static relationship with CGIP. Thus, this study focuses on
limited resources, firms should fully utilise specific organisational pro­ exploring whether financial flexibility affects CGIP, through what
cesses to deploy and coordinate different resources, unleash the impact mechanisms it has an impact, how the impact varies in different
of their capabilities on innovation, clear the path for innovation, and corporate and market environments, and whether the impact is more
form a high-quality virtuous cycle of development (El Maalouf and pronounced in different firm types, regions, and industries.
Bahemia, 2023; Wang and Ma, 2024). However, the current academic The potential marginal contributions of this study are as follows.
research on whether improving financial flexibility can help firms obtain First, based on the micro-panel data of A-share listed companies, this
or mobilise financial resources, enhance innovation capabilities in un­ study examines the relationship between financial flexibility and CGIP,
certain environments, and maximise firm value is still in its infancy and as well as the underlying transmission mechanisms, from the dual per­
requires more empirical evidence. In light of the deficiencies in current spectives of corporate risk-taking and non-efficiency investment. This
research, this paper, based on the financial flexibility organisation the­ approach helps to reveal the mechanism through which financial flexi­
ory, attempts to explore the differential impacts of varying levels of bility affects CGIP and extends the existing research on the relationship
financial flexibility on corporate green innovation behaviour. It also and transmission mechanisms between the two. Second, this study
discusses the distinct innovation effects of cash flexibility and debt builds on the work of Adomako and Ahsan (2022) and Barry et al.
flexibility. This study aims to deepen the understanding of how financial (2022). It not only tests the impact of financial flexibility on CGIP but
flexibility affects the high-quality development of the real economy at also incorporates variables closely related to financial flexibility, such as
the micro level. corporate ESG performance and market competitiveness, into a unified
Financial flexibility creates options for firms to meet unforeseen theoretical framework. This allows for an analysis of how the impact of
future financing and investment needs, which is the core value of financial flexibility on CGIP varies under different scenarios, providing
financial flexibility. Specifically, firms typically hold cash reserves evidence for a comprehensive understanding of the contingency char­
above the expected level to avoid the dilemma of internal funding acteristics and applicable conditions of financial flexibility. Third, while
shortages and high external financing costs (Ampofo and Mantey, 2021). existing literature has predominantly examined financial flexibility from
A high level of cash holdings can also provide firms with strategic a single perspective, such as cash holdings or financial leverage
flexibility. Moreover, firms with low leverage have the potential to raise (DeAngelo et al., 2022), this study decomposes financial flexibility into
funds by increasing their leverage in the future. Thus, firms can achieve cash flexibility and debt flexibility. It then examines the actual effects of
financial flexibility by maintaining debt levels below the expected these two types of financial flexibility over a relatively long time hori­
threshold (Rahiminejad, 2024). The precautionary attribute of financial zon. This approach helps to reveal the asymmetric effects of financial
flexibility can alleviate firms’ financing pressure, which is conducive to flexibility on CGIP and enriches the literature on the economic conse­
enhancing innovation levels and core competitiveness. The utilisation quences of financial flexibility. Finally, this study further investigates
attribute can effectively allocate financial resources, helping firms seize the adaptive effect of corporate financial flexibility under uncertainty. It
opportunities and significantly increase value (Yang et al., 2015). finds that the improvement of financial flexibility varies significantly
However, in addition to its positive effects, financial flexibility can across different firm types, regions, and industries. These findings have
also have various negative impacts on firms. Studies have shown that the important practical implications for guiding firms in developing finan­
investment efficiency of financially flexible firms is significantly lower cial flexibility strategies to enhance CGIP.
than that of non-financially flexible firms (Lee et al., 2024). High levels
of cash holdings can lead to distorted investment. Moreover, excessive 2. Literature review
financial flexibility may induce managerial opportunism in the short
term, resulting in overinvestment and negatively affecting firm growth For an extended period, capital structure, as a core aspect of corpo­
(Brozovic, 2018). rate financial management, has been a focal point of scholarly research
Corporate innovation performance is linked to managerial decision (Kruk, 2021). The trade-off theory of capital structure posits that firms
analysis and financial management. As a crucial manifestation of orga­ possess an optimal capital structure (DeAngelo, 2022). However, it
nizational flexibility within financial systems, financial flexibility re­ struggles to explain why some highly liquid and profitable firms forgo
mains a core concern for managers in financial decision-making (Choi substantial interest tax shields and maintain debt levels below the target
et al., 2018). Given the demands of financial flexibility, companies must capital structure (Magomo, 2020). In recent years, studies have analysed
address the operational challenges posed by complex external environ­ the investment and financing behaviours of firms from a dynamic
ments and the financial dilemmas arising from uncertain future cash perspective, arguing that firms retain high levels of cash and low levels
flows. Therefore, firms need to effectively integrate internal and of financial leverage to achieve financial flexibility (Fahlenbrach et al.,
external resources to continuously inject stable cash flows into core 2021). Therefore, financial flexibility is considered an indispensable key
innovation activities, thereby enhancing CGIP (Martin et al., 2016; element in explaining capital structure (Saona et al., 2024).
Zhang et al., 2025). As economic policy uncertainty has increased, the economic conse­
Existing research has provided profound insights into corporate quences of financial flexibility have garnered increasing attention from
innovation performance; however, discussions from a financial the academic community, with relevant research findings primarily re­
perspective remain relatively scarce. Owing to the prolonged and un­ flected in two areas: corporate investment and corporate value (Wu
certain nature of corporate green innovation activities, the demands on a et al., 2025). Regarding corporate investment, existing research has

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S. Ma and A. Appolloni Journal of Environmental Management 387 (2025) 125869

focused on investment expenditure, investment performance, and between internal control levels and CGIP. Effective risk management can
innovative investment. First, investment expenditure. Barry et al. (2022) foster innovation. Equity incentives, as an effective way to resolve
found that financial flexibility can enhance a firm’s investment capacity. principal-agent problems, can also significantly promote CGIP (Yan
Firms that achieve financial flexibility through low-leverage policies et al., 2022). However, equity pledges by controlling shareholders can
significantly increased capital expenditure and abnormal investment, suppress CGIP (Lin et al., 2019). It is worth noting that Wang et al.
with long-term effects outweighing short-term ones. Financial flexibility (2023) argued that the wealth concentration of actual controllers can
reserves can enhance a firm’s ability to withstand adverse shocks, as reduce corporate risk-taking, thereby suppressing CGIP.
evidenced by a substantial increase in investment expenditure at the In terms of research on the impact of financial flexibility on CIP, it
onset of financial crises (Tascón et al., 2024). Liu (2024) examined the has been found that, compared with firms with low financial flexibility,
impact of financial flexibility on the investment preferences of Chinese firms with high financial flexibility experience a value increment pro­
firms. The study revealed that firms with higher operational risks are cess. Although the marginal impact of increased cash holdings on firm
more likely to convert financial flexibility into physical investment to value is diminishing, the impact of maintaining financial flexibility on
manage risks and improve expected returns (Campiglio et al., 2023). firm value remains positive until the marginal benefits of holding cash
Second, investment performance. Yeniaras et al. (2021) argued that approach the marginal costs (Martínez-Sola et al., 2013). However, in
financial flexibility has a double-edged sword effect on inefficient in­ addition to positive effects, financial flexibility can also have various
vestment. That is, financial flexibility can effectively alleviate financing negative impacts on firms. Studies have shown that the investment ef­
constraints, thereby curbing under-investment (Chiu et al., 2022), while ficiency of firms with financial flexibility is significantly lower than that
a clear positive relationship exists between financial flexibility and of firms without financial flexibility (Bagh et al., 2024), and high levels
over-investment (Zhao et al., 2022). Third, innovative investment. of cash holdings can lead to distorted investment. Kusnadi (2011)
Chortareas and Noikokyris (2021) contended that financial flexibility in argued that when corporate governance levels decline, cash holdings are
firms can increase research and development expenditure. It is note­ negatively correlated with firm value. The characteristics of debt
worthy that, in terms of corporate value, most literature suggests that repayment and interest payment can effectively constrain managers’
financial flexibility reserves can enhance corporate value (Graham, arbitrary use of financial resources. However, financial flexibility re­
2022). Specifically, financial flexibility significantly boosts corporate quires firms to retain as much residual debt capacity as possible, which
value by influencing financing constraints, investment efficiency, capital weakens the governance effect of debt (Iancu et al., 2017). He et al.
structure, and uncertainty (Li et al., 2021). As a prerequisite for the (2015) found that debt financing improves corporate governance levels,
establishment of the financing constraint theory, financial flexibility is with the governance effect of debt being particularly evident in
believed to provide funding for corporate activities through the opti­ non-state-owned firms compared with state-owned firms. Moreover,
misation of capital structure, at a lower cost of transactions and op­ high debt flexibility implies that firms forgo substantial tax shield ben­
portunity costs (Nguyen et al., 2023). This is achieved by employing efits, and a negative correlation exists between the firm’s debt-to-asset
financial flexibility policies, including cash flexibility and debt flexi­ ratio and the value of the “debt tax shield” (Hanlon and Heitzman,
bility, to cushion or prevent financial risks caused by uncertain shocks 2022).
(Shukla et al., 2024). Particularly during the new economic normal, with In summary, existing literature has predominantly focused on the
the spread of trade protectionism and the readjustment of the global economic consequences of financial flexibility and the factors influ­
production pattern, the objectives of financial flexibility policies have encing CGIP. However, there has been limited research on the impact of
increasingly emphasised the ability to exploit opportunities and culti­ internal preventive financial measures, such as financial flexibility
vate innovation (Matalamäki and Joensuu-Salo, 2022). This shift helps policies, on green innovation. While some studies have examined the
firms transition to an “inside-out” innovation-driven development impact of financial flexibility on CGIP from the perspectives of equity
model, which is akin to providing timely assistance for firms to enhance structure and dynamic capabilities, few have explored this relationship
their independent innovation efficiency at this stage (Campos-Blázquez from the multiple perspectives of risk-taking and non-efficient invest­
et al., 2024; Liu et al., 2025). ment. Additionally, no studies have investigated the moderating effects
Corporate innovation performance (CIP) directly determines of ESG performance and market competitiveness on the relationship
whether a firm can gain a competitive advantage in the market. between financial flexibility and CGIP.
Research on the drivers of CIP has long been a hot topic in academia In addition, the theory of core competencies posited that the
(Arici et al., 2023). Regarding the drivers of corporate innovation, knowledge and unique capabilities accumulated by firms served as the
numerous scholars have conducted extensive research from various foundation for developing competitive advantages during their growth
perspectives, including firm size, ownership structure, strategic alliances in specific environments (Azeem et al., 2021). Accordingly, when
or research and development cooperation, industrial clusters, govern­ engaging in green innovation activities, firms were not only expected to
ment intervention or fiscal subsidies, and market competition (Okamuro align with external environmental improvements but also to proactively
et al., 2025). enhance their internal environments (Bhatia, 2021). Under resource
The factors influencing CGIP is a relatively mature research area. constraints, firms were required to effectively utilise specific organisa­
Existing literature identifies two main categories of influencing factors: tional processes and coordinate diverse resources to unleash the impact
external environment and firm-specific characteristics. In terms of the of internal capabilities on innovation (Farzaneh et al., 2022). This
external environment, existing studies have primarily examined the approach facilitated the establishment of a continuous innovation
impact of government policies (Hao et al., 2024), legal systems (Bi et al., pathway and fostered a virtuous cycle of high-quality development
2024), and the development of capital markets (Xiang et al., 2022) on (Marino et al., 2023).
CGIP. Economic policy uncertainty (Cui et al., 2023), unavailability of However, existing academic research on whether improvements in
credit resources (Zhang et al., 2021), and online public opinion attention financial flexibility enabled firms to access or mobilise financial re­
(He et al., 2024) have been shown to significantly inhibit the quality of sources (Naseer et al., 2024), and thereby enhance their green innova­
CGIP. In contrast, financial technology (Tian et al., 2023), tax incentives tion capabilities under uncertain conditions to maximise corporate value
(Amore and Bennedsen, 2016), government subsidies (Xia et al., 2022), (Yuan and Cao, 2022) remained in its infancy. There was a pressing need
and the development and openness of capital markets (Sha et al., 2022) for further empirical evidence in this area. In light of the current
have effectively promoted CGIP. research gap, this study was grounded in the “theory of financial flexi­
Regarding firm-specific characteristics, internal governance struc­ bility in organisations” and sought to examine the differential effects of
tures also influence corporate innovation activities (Boubakri et al., financial flexibility on CGIP behaviours. Furthermore, it explored the
2021). Chan et al. (2021) demonstrated a significant positive correlation transmission mechanisms through which financial flexibility influenced

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such behaviours, aiming to deepen understanding, from a micro-level 3.2. The role of the risk-taking channel
perspective, of how financial flexibility capabilities contributed to the
development of a high-quality real economy. Financial flexibility enhances CGIP by reducing the risk-taking
behavior of companies. Financial flexibility is characterized by ample
3. Theoretical exploration and study hypotheses free cash flow and lower financial leverage, enabling firms to quickly
address funding shortfalls in the face of uncertainties, thereby pre­
This section develops hypotheses by reviewing the existing literature venting financial distress. This capacity mitigates the impact of external
to address the following questions: Does financial flexibility affect CGIP? shocks on company operations, improving stock performance and will­
If so, through what mechanisms does financial flexibility influence ingness to innovate (Duan et al., 2025).
CGIP? What factors moderate the relationship between financial flexi­ When financial flexibility is insufficient, firms may experience
bility and CGIP? inadequate cash reserves, leading to heightened liquidity risks and
financial crises. Even mild external shocks can result in profit declines or
3.1. The influence of financial flexibility on CGIP losses, pushing the firm into operational difficulties (Shen et al., 2025).
A lack of capacity for innovation investment prevents firms from
The relationship between financial flexibility and innovation activ­ consistently injecting stable cash flows into high-level R&D activities,
ities has attracted substantial scholarly attention, with a particular focus which subsequently suppresses CGIP. Moreover, according to agency
on the connection between financial flexibility and innovation invest­ theory, to avert bankruptcy or acquisition, management may be more
ment (Varadarajan, 2023). Scholars have posited that maintaining a prone to allocate financial assets to smooth earnings. Risk-averse man­
higher level of cash reserves and reducing debt to ensure future agers tend to be cautious regarding high-risk activities such as R&D
borrowing capacity can enhance a firm’s financial resource-raising innovation, negatively impacting CGIP (Li et al., 2021). Additionally,
ability, thereby promoting investment in research and development high leverage increases the risk of debt default, leading banks to demand
(R&D) (Irfan et al., 2022). In other words, financial flexibility is believed higher interest rates, which adversely affects green innovation invest­
to foster CGIP. Tian et al. (2023) argued that firms that retain higher ment. With rising bankruptcy risks, firms may incur higher labor costs,
financial flexibility can mitigate financing constraints and seize invest­ further diminishing CGIP. To meet banks’ collateral requirements, firms
ment opportunities, which is conducive to enhancing firm value. Dai might increase fixed asset investments while reducing
et al. (2018), using Chinese high-tech firms as their research sample, knowledge-oriented R&D investments, limiting their green innovation
found that the greater the financial flexibility reserves a firm has, the capabilities (Bi et al., 2024). From this, the subsequent hypothesis is
higher its innovation investment tends to be. Rapp et al. (2014) deduced:
discovered that firms with higher financial flexibility experience lower
Hypothesis 2. Financial flexibility can reduce levels of risk-taking,
liquidity constraints and enjoy a certain degree of financial stability. The
enhance corporate profit stability, and contribute to improved CGIP.
stability of funding sources can ensure the financial commitment to R&D
activities. Liu et al. (2024) suggested that financial flexibility can
effectively alleviate innovation underinvestment by easing financing 3.3. The function of the non-efficiency investment channel
constraints. Innovation R&D is a long-term and continuous process that
requires a substantial and sustained financial input. Moreover, the Financial flexibility, by increasing non-efficient investment, thereby
confidential nature of R&D activities can lead to information asymmetry enhances the CGIP. Non-efficient investment by firms refers to the
between the firm and external parties (Glaeser and Lang, 2024), discrepancy between actual and optimal investment scales (Chen et al.,
resulting in differences in internal and external financing costs (Wadhwa 2017), that is, the presence of over-investment or under-investment. The
et al., 2017). Therefore, relying solely on debt and equity financing to theory of organisational flexibility posits that the internal and external
obtain sufficient funds is challenging (Naseer et al., 2024). When faced environments in which firms operate are dynamic and constantly
with financing constraints, maintaining financial flexibility can effec­ changing. Firms need to maintain a certain level of flexibility to pro­
tively alleviate the pressure from such constraints, provide opportunities actively prevent and adapt to environmental changes, and to flexibly
to capture attractive innovation investment projects, and supply a stable adjust their business investment strategies and structures to cope with
cash flow for innovation activities, thereby enhancing innovation output external adverse shocks and establish a competitive advantage. Finan­
and efficiency (Xiang et al., 2022). cial flexibility is the application of the theory of organisational flexibility
Other scholars have examined the relationship between financial in the financial management system. It refers to the dynamic capability
flexibility and CGIP from different perspectives. Martínez-Sánchez et al. of firms to hold cash and retain residual debt capacity at a lower cost in
(2020) argued that maintaining a certain level of financial flexibility order to cope with financial risks and seize future favourable investment
reflects a firm’s commitment to an innovation strategy, secures funding opportunities, and to scientifically and effectively allocate and adjust
sources for R&D investment, and helps firms enhance their ability to financial resources (Zhang et al., 2021).
integrate knowledge and information. This, in turn, can improve the On the one hand, in order to maintain financial flexibility, firms may
firm’s innovation level through technological spillovers. Fahlenbrach hold excessive cash or retain too much debt capacity, which can lead to
et al. (2021) contended that financial flexibility represents a firm’s idle and wasted resources (Zeng et al., 2024). The low internal cost of
resource availability and can mitigate the negative impact of innovation cash flexibility provides a unique strategic decision-making advantage,
uncertainty on business operations and profit quality. It not only pro­ enabling firms to quickly seize opportunities, expand investment scales,
vides financial security for R&D investment but also coordinates issues and enhance firm value and CGIP. Based on the agency theory and the
related to technological, market, and organisational uncertainties, free cash flow hypothesis, in the presence of information asymmetry,
thereby reducing the risks associated with innovation (Hitt et al., 2016). excessive cash holdings exacerbate the agency conflicts between firm
Overall, a higher level of financial flexibility provides firms with greater shareholders and managers, and widen the divergence of interests be­
innovation space and lower innovation risks, facilitating smooth inno­ tween them (Yeniaras et al., 2021). When firms have high levels of cash
vation progress and enhancing innovation output (Ogbeibu et al., 2021). reserves, managers are given greater room for rent-seeking, which in­
Hence, the subsequent hypothesis is presented: duces their short-term opportunism, leading to more unexpected in­
vestment behaviours and causing the actual investment scale to far
Hypothesis 1. A firm that maintains high financial flexibility signifi­
exceed the target investment scale (Martin et al., 2016). Firms with high
cantly enhances its CGIP.
levels of financial flexibility tend to expand investment, thereby
enhancing their value-creating capabilities.

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On the other hand, firms may overly rely on internal funds for in­
vestment while neglecting external financing opportunities, resulting in
under-investment. Financial flexibility enables firms to maintain inno­
vation activities using internal funds when external financing conditions
are unfavourable, thereby alleviating financing constraints (Wang et al.,
2025). This flexibility allows firms to continue investing in innovation
even when market conditions are adverse, even if this may lead to
short-term non-efficient investment. Firms may reduce investment in
existing projects due to excessive caution, thereby freeing up more re­
sources for new innovation activities. Moreover, when firms have low
financial leverage, they are subject to weaker monitoring and con­
straints from creditors, which may trigger moral hazard and opportu­
nistic behaviour in the capital market, leading to an expansion of the
firm’s investment scale and an increase in non-efficient investment. To
some extent, this investment expansion can enhance CGI investment and Fig. 1. Theoretical model.
improve their CGIP (Choi et al., 2018). Therefore, the following hy­
pothesis is proposed. market competition can alleviate agency problems related to environ­
mental strategies from both external supervision and internal gover­
Hypothesis 3. Financial flexibility can increase non-efficient in­
nance perspectives.
vestments, promote actual investment levels that significantly exceed
From an external supervision standpoint, information asymmetry
target investment levels, and contribute to improved CGIP.
exists between companies and the public, and green innovation poses
challenges such as high risk, substantial investment, and long cycles.
3.4. The corporate ESG performance functions as a moderating influence Management may engage in greenwashing by misrepresenting envi­
ronmental intelligence to gain public trust and protect corporate repu­
Corporate ESG performance, which includes environmental protec­ tation (Torelli et al., 2020). In a highly competitive market environment,
tion, social responsibility, and corporate governance, serves as a transparency improves with enhanced competitive structures, thereby
moderating factor in the influence of financial flexibility on CGIP. reducing the public’s supervision costs and increasing social pressure on
Effective environmental protection and fulfilment of social re­ corporate environmental behaviours. This can prompt executives to
sponsibilities can weaken the advantageous effect of financial flexibility reduce fraudulent environmental disclosures, effectively alleviating
on CGIP, as superior ESG performance may create a siphoning effect agency problems and helping firms overcome barriers to green inno­
(Farza et al., 2021). Due to limited internal resources, expenditures on vation (Zhou et al., 2024).
environmental and social responsibilities may encroach upon the Existing research suggests that in regions with strong market
financial resources necessary for business operations and R&D, resulting competition, the costs of environmental violations for firms are higher
in insufficient operational and R&D investments that hinder the (Wen et al., 2024). Financial flexibility can effectively constrain mana­
enhancement of a firm’s innovative capabilities (Perkmann et al., 2021). gerial environmental pollution behaviors, with the dual effects of
According to the management opportunism hypothesis, the intention of external regulatory environments and internal environmental strategies
corporate management to fulfil environmental and social re­ jointly contributing to improved corporate performance (Lucas and
sponsibilities is not primarily to increase shareholder value, but rather to Noordewier, 2016). Conversely, in weak competitive environments,
enhance their own reputation and interests, such as gaining political firms’ enthusiasm for participating in environmental protection is
legitimacy (Fei, 2015). Agency problems can lead firms to expend re­ neither encouraged nor enhanced, leading to a gradual decline in green
sources on environmental protection and social responsibility, creating a innovation capabilities and subsequent stagnation in corporate perfor­
crowding out effect on core business activities. mance. As a result of this analysis, the following hypothesis is
Corporate governance also mitigates the positive influence of considered:
financial flexibility on CGIP. On one hand, existing research indicates
that corporate governance can significantly improve a firm’s internal Hypothesis 5. Market competitiveness has a positive moderating ef­
control environment. However, it may simultaneously reduce invest­ fect on the connection between financial flexibility and CGIP.
ment in innovation projects that require substantial funding, have long
R&D cycles, and are high-risk. On the other hand, listed companies 4. Study design
exhibit varying quality in ESG information disclosure and may engage in
"greenwashing." Management might manipulate ESG reports to mask 4.1. Design of the econometric model
poor financial conditions and establish a façade of being environmen­
tally friendly and resource-efficient (Opferkuch et al., 2022), thereby This article constructed baseline models (1) and (2) to examine the
enhancing the company’s reputation. However, this practice exacer­ effect of financial flexibility on CGIP. The dependent variables Patenti,t
bates information asymmetry and resource allocation issues, suppress­ and Granti,t represented the CGIP of firms, while the core explanatory
ing improvements in CGIP. In view of this research, the subsequent variable FFi,t− 1 denoted the financial flexibility of the firms, where the
research hypothesis is submitted: subscript i represented the firm and t represented the year. The terms μi
and θt represented individual and year fixed effects, respectively, con­
Hypothesis 4. Corporate ESG performance has a negative moderating
trolling for time-invariant factors at the firm level and common shocks at
effect on the connection between financial flexibility and CGIP.
the annual level. The term εi,t represented the random disturbance term.
In summary, the research framework of this paper is shown in Fig. 1. If research hypothesis 1 was upheld, it was expected that the regression
coefficient for financial flexibility (FF) would be significantly greater
3.5. The moderating role of market competitiveness than zero, indicating that financial flexibility would significantly
enhance corporate innovation performance.
∑
Market competition is a fundamental characteristic of market econ­ Patent i,t = α0 + α1 FFi,t− 1 + α2 Controls i,t + μi + θt + εi,t (1)
omies, influencing corporate green technology innovation activities and
subsequently altering corporate strategies (Shao et al., 2020). Intense

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S. Ma and A. Appolloni Journal of Environmental Management 387 (2025) 125869

∑
Grant i,t = α0 + α1 FFi,t− 1 + α2 Controls i,t + μi + θt + εi,t (2) market in Shanghai and Shenzhen between 2009 and 2022, utilizing
data obtained from the Wind database, CSMAR database, as well as the
Models (3), (4) and (5) were constructed to verify whether both official website of the National Intellectual Property Administration.
primary transmission channels were effective through a three-step The sample underwent the following processing: (1) Samples with
verification procedure. The establishment of the mediating effect missing data were excluded. (2) ST and *ST companies,1 as well as those
required the following conditions: first, the influence of financial flexi­ in the finance and insurance sectors, were eliminated. All continuous
bility on CGIP must be significant, indicating that the coefficient for variables were trimmed to fall within the 1 %–99 % range, resulting in a
financial flexibility in the baseline regression was statistically signifi­ final total of 9296 samples.
cant. Second, the effect of financial flexibility on the mediating variables
(Mediate) must also be significant, specifically including the two chan­ 4.3. Variable definitions
nels of corporate risk-taking and non-efficiency investment. Lastly,
when CGIP, financial flexibility, and the mediating variables were 4.3.1. Independent variable: financial flexibility (FF)
included in the regression model, if the coefficient for the mediating Firms primarily obtained financial flexibility by maintaining high
variable was significant and the coefficient for financial flexibility was levels of cash, low levels of debt, and through equity financing. Given
not significant, the mediating variable would exhibit a complete medi­ China’s unique institutional context, dividend payments had minimal
ating effect. If the coefficient for financial flexibility was significant, the impact on firms’ financial flexibility. Drawing on the research of Fliers
mediating variable would demonstrate a partial mediating effect. (2019), this study measured financial flexibility (FF) as the sum of a
∑ company’s residual debt capacity and the amount of excess cash re­
Mediate i,t = β0 + β1 FFi,t− 1 + β2 Controls i,t + μi + θt + εi,t (3)
serves. Specifically, financial flexibility is defined as: FF = Cash Flexi­
∑ bility (CF) + Debt Flexibility (DF). Where Cash Flexibility (CF) is
Patent i,t = γ0 + γ1 Fi,t− 1 + γ 2 Mediate i,t + γ3 Controls i,t + μt + θt + εi,r calculated as the ratio of the firm’s cash holdings to the industry average
(4) cash ratio, and Debt Flexibility (DF) is defined as: DF = max (0, Industry
∑ Average Debt Ratio - Firm’s Debt Ratio). Additionally, due to the lagged
Grant i,t = γ 0 + γ 1 Fi,t− 1 + γ2 Mediate i,t + γ 3 Controls i,t + μt + θt + εi,r nature of the reserve value of financial flexibility, the independent
(5) variable was treated with a one-period lag, and cluster-robust standard
errors at the company level were utilised.
To test research hypotheses 4 and 5, this study constructed a medi­
ating path model according to Yu et al. (2022), as shown in Equations
4.3.2. Dependent variable: CGIP (Patent)
(6)–(9). Equations (6) and (7) reflect the moderating effect of corporate
In line with the work of Wang et al. (2022), this article employed the
ESG performance (ESG) on financial flexibility and CGIP, and equations
natural logarithm of the total number of green patent applications plus
(8) and (9) reflect the moderating effect of market competitiveness (MC)
one (Patent) and the natural logarithm of the total number of green
on financial flexibility and CGIP. The regression coefficients of the
patents granted plus one (Grant) to measure CGIP.
interaction terms were used to test the hypotheses 4 and 5.
∑
Patent i,t = a0 + a1 FFi,t− 1 + β3 ESGi,t + β4 ESGi,t × FFi,t− 1 +β5 Controls i,t 4.3.3. Mediating variable

+ μi + θt + εi,t
(1) Risk-taking (Risk)
(6)
∑ Inspired by Boubakri et al. (2013), this study measured the degree of
Grant i,t = a0 + a1 FFi,t− 1 + β3 ESGi,t + β4 ESGi,t × FFi,t− 1 +β5 Controls i,t risk-bearing by examining the variability of a company’s profits. over
+ μi + θt + εi,t the observation period. Increased earnings volatility signifies a higher
(7) degree of risk undertaken. To account for the influence of industry di­
versity on company profitability, the return on assets was normalized
∑
Patent i,t = a0 + a1 FFi,t− 1 + β3 MCi,t + β4 MCi,t × FFi,t− 1 +β5 Controls i,t against industry benchmarks with the following equation (10):

+ μi + θt + εi,t 1 ∑
Roaadj
i,t = Roai,t − Roai,t (10)
(8) Nj,t

∑ 1
∑
Grant i,t = a0 + a1 FFi,t− 1 + β3 MCi,t + β4 MCi,t × FFi,t− 1 +β5 Controls i,t Where Nj,t Roai,t denotes the average value of return on assets for the
industry in which firm i is located, j denotes the industry code, t denotes
+ μi + θt + εi,t
the year, and Nj,t denotes the total number of firms in industry j for
(9)
period t. The adjusted standard deviation of firms’ return on assets
( )
In this part, we will introduce the source of the sample data and the σ Roaadj
i,t is measured every 3 years as an observation, where t denotes
measurement methods for the variables. To minimize errors arising from the year in the observation time period, and takes the value 1–3, T = 3
omitted variables and unobservable factors, we controlled for both in­ denoting a rolling 3-year cycle.
dividual and time fixed effects, thereby providing a more accurate √̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
( )2̅
estimation of the influence of financial flexibility on corporate green (
√
) √ 1 ∑ T
1∑ T
adj adj adj
innovation efficiency. A-share listed companies on the Shanghai and σ Roai,t = √ Roai,t − Roai,t (11)
T − 1 i=1 T i=1
Shenzhen stock exchanges were chosen due to the A-share market being
one of the largest and significant stock markets in China, providing a
comprehensive reflection of the overall state of the domestic economy
and the functioning of the capital market.
1
In the Chinese stock market, ST and *ST are two common risk warning
indicators. ST denotes “special treatment”and is typically used to alert investors
4.2. Sample and data sources to potential issues in a company’s financial condition. *ST signifies a“delisting
warning”and is utilised to caution investors that the company may be at risk of
This research concentrated on companies listed on the A-share being delisted.

6
S. Ma and A. Appolloni Journal of Environmental Management 387 (2025) 125869

governance structures and financial characteristics (Masum et al.,

(2) Non-efficiency investment (Invest)
2024), specifically including: firm size (SIZE), profitability (ROA), board
size (BOARD), ownership concentration (TOP), share of independent
Scholars commonly employ three methods to measure inefficient
directors (INDEP), duality of roles (DUAL), number of employees (EMP),
investment: the FHP model, the Vogt model, and the Richardson residual
and fixed asset levels (Fixed). The calculation methods for these vari­
model. Given that the Richardson residual model provides a more ac­
ables are outlined in Table 1.
curate and comprehensive measure of corporate investment efficiency
compared to the FHP and Vogt models, this study adopted the model
4.4. Descriptive statistics
proposed by Richardson (2006) to calculate inefficient investment. In
the regression equation (12), the residual term represents the discrep­
4.4.1. Results of descriptive statistical evaluation
ancy between the actual investment amount and the pre-determined
Table 2 shows the findings from the descriptive statistics of the
investment standard or expected value during the model calculation
variables. The findings indicated that the mean Patent was 2.551, with a
process. By measuring and comparing the absolute values of the re­
standard deviation of 1.465. The mean Grant was 1.999, with a standard
siduals, the degree of inefficiency in corporate investment decisions can
deviation of 2.554, reflecting an uneven development of CGIP among
be assessed.
firms. The mean FF was 0.061, suggesting that firms maintained a sig­
Invi,t = μ0 + μ1 Levi,t− 1 + μ2 Growthi,t− 1 + μ3 Agei,t− 1 + μ4 Cashi,t− 1 nificant degree of financial flexibility reserves. However, the highest
(12)
+μS Returni,t− 1 + μ6 Sizei,t− 1 + μ7 Invi,t− 1 + Ind + Year + εi,t value reached 0.817, while the lowest value was − 0.221, indicating a
substantial disparity. Some firms even exhibited negative financial
An ordinary least squares (OLS) regression was conducted on equation flexibility, potentially due to a lack of emphasis on financial flexibility
(12) to obtain the residual term. A residual value greater than zero and poor financial management awareness. The highest value recorded
indicated that the sample firm engaged in over-investment, while a re­ for Risk was 31.110, whereas the lowest was 0.019, suggesting signifi­
sidual value less than zero suggested under-investment. Both scenarios cant variation in risk-taking levels across different sample firms. The
represent inefficient investment behaviours. Therefore, the absolute mean Invest was 0.074, indicating its widespread presence among firms.
value of the residual term was taken to measure the degree of inefficient The mean ESG was 81.543, with a SD of 4.329, suggesting that the ESG
investment, with a larger absolute value indicating a higher degree of performance of the selected firms was generally at a moderate level,
inefficient investment. Where Inv i,t represents the current investment although notable differences existed among the ESG performances of
level of the firm. Control variables included leverage (Lev), growth po­ different firms.
tential (Growth), years since the firm’s initial public offering (Age), the
ratio of cash and cash equivalents to total assets (Cash), annual stock 5. Empirical findings and analysis
returns (Return), firm size (Size), as well as industry fixed effects (Ind)
and year fixed effects (Year). The absolute value of the model residuals 5.1. Multicollinearity test
obtained from this regression served as a proxy for non-efficiency
investment. From the results of the variance inflation factor (VIF) calculation
shown in the last column of Table 2, it can be seen that the larger the VIF
4.3.4. Moderating variables value, the higher the degree of covariance between the variables. Ac­
This research established corporate ESG performance (ESG) as a cording to Kalnins (2018), it is usually considered that when the VIF
moderating variable, measured using Huazheng ESG scoring data. value of a variable exceeds 10, it indicates that the variable may have a
Following the work of Hu et al. (2023), the first component represents a serious problem of multicollinearity. In this table, the VIF values of both
standardised measure of a firm’s position relative to its peers within the explanatory and control variables are below the critical value of 10.
distribution of environmental rating disclosure scores (ER), while the Therefore, based on this result, it can be concluded that the model
second component reflects the firm’s position in relation to its peers studied in this paper does not have a significant multicollinearity
within the distribution of actual environmental performance scores. The problem.
difference between these two measures represents the firm’s ESG
component, as shown in equation (13). 5.2. Benchmark regression
( ) ( )
ERi,t − ERdis ERi,t − ERper
ESGi,t = − (13) Table 3, column (1) and (2), presents the influence of financial
σ dis σper
flexibility on CGIP. After controlling for relevant variables, the regres­
There is no universal agreement within the scholarly community on sion coefficient for financial flexibility was 1.337 and 1.190, which was
the metrics that accurately reflect market competitiveness, existing significant at the 1 % level. This indicates that financial flexibility had a
research primarily measures it in two ways. Firstly, the Herfindahl- positive effect on CGIP, suggesting that an increase in financial flexi­
Hirschman Index is used to represent inter-industry competition bility reserves led to enhanced CGIP, thereby confirming research hy­
(Haushalter et al., 2007). Secondly, the main business profit margin is pothesis 1. A plausible economic explanation is that financial flexibility
employed to depict intra-industry competition (Chang et al., 2015). can provide sufficient funding sources for innovation activities with long
Compared to inter-industry competition, intra-industry competition cycles, thereby ensuring the long-term innovation activities of firms and
exerts a greater influence on corporate environmental actions. The main fostering the development of green innovation capabilities. Financial
business profit margin can, to some extent, be viewed as the firm’s flexibility, on the one hand, enhanced the capability to respond to
"monopoly rent"; firms with higher monopoly rents have a stronger external environmental shocks, ensuring the advancement of internal
market position, whereas lower monopoly rents indicate higher green innovation projects. On the other hand, it reduced the risks
competition. Thus, this research utilised the profit margin from principal associated with green innovation, enabling decision-makers to more
operations as an indicator of market competitiveness, with a larger confidently select green innovation projects and actively seek opportu­
market competitiveness index indicating higher levels of intra-industry nities for industrial and technological upgrades, ultimately promoting
competition. improvements in CGIP.

4.3.5. Control variables 5.3. Mechanism verification

This article selected control variables related to corporate
Table 3 also illustrates the findings of the mechanism verification

7
S. Ma and A. Appolloni Journal of Environmental Management 387 (2025) 125869

Table 1 Table 2
Definitions and measurements. Descriptive statistics and multicollinearity test.
Variable Definition Description Calculation Variable Obs Mean SD Min Max VIF

Patent Green innovation Measuring the Ln(1+ total green Patent 18654 2.511 1.465 0 6.870 –
performance improvement of the patent applications) Grant 18654 1.999 2.554 0 5.195 –
Grant Green innovation economic, social and Ln(1+total green FF 18654 0.061 0.165 − 0.221 0.817 2.892
performance environmental patent grants) Risk 18654 2.882 0.228 0.019 31.110 –
performance of Invest 18654 0.074 0.088 0 1.153 –
enterprises ESG 18654 81.543 4.329 39.900 90.187 –
FF Financial Flexibility and Financial flexibility = MC 18654 2.914 3.981 0.338 3.995 –
flexibility adaptability Cash flexibility + Debt SIZE 18654 16.726 3.529 15.338 23.104 3.111
demonstrated by flexibility ROA 18654 0.029 0.049 − 0.335 0.259 2.651
enterprises in capital BOARD 18654 1.998 0.194 1.765 2.359 1.876
operations and TOP 18654 31.139 14.220 6.998 67.717 3.670
financial activities INDEP 18654 39.115 8.335 24.523 55.711 2.897
Risk Risk-taking The behavior of a Annual-industry- DUAL 18654 0.326 0.336 0 1 4.033
company that is willing adjusted corporate EMP 18654 6.227 1.224 3.896 10.483 3.204
to bear the adverse ROA 3-year rolling Fixed 18654 9.786 0.733 8.659 12.977 1.762
consequences that standard deviation
result when faced with
a variety of regarding the influence of financial flexibility on CGIP. The estimated
uncertainties.
findings for financial flexibility in columns (1) and (2) were significantly
Invest Non-efficiency Investment decisions The residual values
investment are made without were obtained from
positive at the 1 % level. The coefficients for FF in columns (4) and (5)
selecting investments the regression analysis were also significantly positive, while the estimated coefficient for
in accordance with the of the revised corporate risk-taking in column (3) was significantly negative at the 1 %
principle of maximising Richardson model, as level. This indicates a negative correlation between corporate risk-
shareholder value, and shown in Model a.
taking and CGIP, suggesting that corporate risk-taking served as a par­
deviation from the These residuals were
optimal level of then subjected to tial mediating factor through which financial flexibility promoted
investment occurs. absolute value innovation performance. This indicates that financial flexibility can
transformation. mitigate the negative impact of risk-taking on CGIP to some extent.
ESG ESG performance Measuring corporate Huangzheng ESG Firms with financial flexibility may be better able to manage risks
performance: Score
environmental
associated with CGIP, ensuring that their innovation activities proceed
protection, social as planned, despite potential uncertainties. The regression coefficient for
responsibility and financial flexibility in column (6) was significantly positive at the 1 %
corporate governance level, indicating that firms with financial flexibility reserves increased
MC Market Reflecting competition (Operating income -
non-efficiency investments. In columns (7) and (8), the regression co­
competitiveness among economic operating costs - taxes
agents in the market for and surcharges)/ efficients for financial flexibility were significantly positive, and the
their own benefit Operating income coefficient for non-efficiency investment was positive at the 1 % level.
SIZE Enterprise size Comprehensive Natural logarithm of This suggests that non-efficiency investment prompted firms to expand
strength of the total assets their investment scale, thereby exerting a positive influence on CGIP to
enterprise in
production, operation,
some extent. Thus, non-efficiency investment acted as a mediating factor
management, etc. in the connection between financial flexibility and CGIP. It also suggests
ROA Enterprise Indicators of efficiency Net profit divided by that firms with financial flexibility reserves are more likely to engage in
profitability and profitability in the total assets non-efficient investments, which in turn have a positive effect on CGIP.
use of enterprise assets
Although non-efficient investments may not yield immediate returns,
BOARD Board size Reflects the number of Logarithmic number of
members of the board board members they can provide valuable technological advancements and insights that
of directors of the contribute to long-term green innovation capabilities. By expanding the
enterprise scale of investment through non-efficient investments, firms can explore
TOP Shareholding Reflecting the Shares owned by the new opportunities in the green innovation field, thereby enhancing
concentration distribution of an largest shareholder/
enterprise’s equity total number of issued
CGIP. Hypotheses 2 and 3 were thereby validated.
among shareholders shares
INDEP Proportion of Important indicators of The ratio of
independent the sophistication of independent directors 5.4. Moderating effect verification
directors corporate governance to the total
structures directorship. To ensure the interpretability of the interaction term coefficients,
DUAL Merging of two Reflects the President and general this study centred the independent variables and moderators before
posts phenomenon of senior manager are the same
managers holding two person as 1, otherwise
constructing the interaction terms. Table 4 presents the findings of the
or more key positions 0. moderation effect test for corporate ESG performance and market
in an organization or competitiveness. As shown in models (1)–(4) of Table 4, the interaction
company at the same terms between corporate financial flexibility and corporate ESG per­
time
formance exhibit a significant positive correlation with CGIP (Patent,
EMP Number of Total number of all The count of
employees active employees in the employees is Grant) (β = − 2.110, p < 0.01; β = − 1.879, p < 0.01). This finding in­
enterprise represented by their dicates that as companies increasingly focus on ESG performance, the
natural logarithm. impact of financial flexibility on CGIP diminishes, suggesting that
Fixed Level of fixed Reflecting the strength Fixed assets of the corporate ESG performance weakens the positive relationship between
assets and operation of the enterprise divided by
enterprise the number of
financial flexibility and CGIP. This may be attributed to the fact that
employees of the improvements in ESG performance typically signify that companies have
enterprise, followed by allocated more resources to environmental, social, and governance ini­
a logarithmic value tiatives. This reallocation of resources can reduce a company’s reliance

8
S. Ma and A. Appolloni Journal of Environmental Management 387 (2025) 125869

Table 3
Results of baseline regression and mechanism verification.
(1) (2) (3) (4) (5) (6) (7) (8)

Patent Grant Risk Patent Grant Invest Patent Grant

FF 1.337*** 1.190*** (2.714) − 0.335*** 1.111*** (3.223) 1.228*** 0.666*** (3.671) 1.021*** 1.014***
(2.898) (− 3.177) (3.367) (2.834) (2.795)
Risk ​ ​ ​ − 0.287** − 0.255** ​ ​ ​
(− 2.110) (− 2.033)
Invest ​ ​ ​ ​ ​ ​ 0.489*** 0.445***
(3.115) (3.066)
SIZE 0.331*** 0.222 (1.536) 0.345*** (4.428) 0.377** (2.188) 0.449 (1.463) 0.307 (1.580) 0.526*** − 0.029
(4.345) (5.555) (− 1.227)
ROA 0.299** (2.162) 0.251 (1.433) 0.444** (2.327) − 0.336 (− 1.339) 0.489** (2.115) 0.446** (2.110) 0.227 (1.011) 0.555***
(3.189)
BOARD − 0.333** − 0.289*** − 0.194** − 0.312 (− 1.440) − 0.458** − 0.220 (− 1.257) − 0.438 − 0.299**
(− 2.118) (− 3.311) (− 2.049) (− 2.348) (− 1.425) (− 2.134)
TOP 0.449** (2.221) 0.772 (1.339) − 0.888 (− 1.240) 1.110*** (3.115) 1.225** (2.117) 0.980*** (2.966) 1.129*** − 0.966**
(3.112) (− 2.225)
INDEP 0.022** (2.414) 0.027 (1.230) 0.021*** (2.982) − 0.017 (− 1.433) 0.054* (1.850) 0.039** (2.115) 0.056 (1.388) − 0.040**
(− 2.266)
DUAL 0.134*** 0.099 (1.333) 0.056** (2.116) 0.111** (2.223) − 0.093** − 0.120*** 0.149** − 0.222
(3.367) (− 2.759) (− 3.115) (2.225) (− 1.338)
EMP 0.044*** 0.031 (1.236) − 0.050** 0.037*** (3.558) 0.112*** 0.029 (1.564) 0.049** 0.011** (2.288)
(3.449) (− 2.330) (3.609) (2.315)
Fixed − 0.112** − 0.066*** 0.110** (2.433) − 0.055*** − 0.066 (1.356) − 0.055** − 0.105 0.206 (1.440)
(− 2.140) (− 3.115) (− 2.768) (− 2.411) (− 1.117)
Control ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
Year ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
Individual ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
R2 0.278 0.319 0.302 0.265 0.244 0.227 0.333 0.239
N 18654 18654 18654 18654 18654 18654 18654 18654

Note: The symbols *, **, and *** signify significance levels of 10 %, 5 %, and 1 %, respectively. t-values are provided in parentheses, and this meaning is consistent
across the following tables.

Table 4
Results of moderating effect test.
Variable (1) (2) (3) (4) (5) (6) (7) (8)

Patent Grant Patent Grant Patent Grant Patent Grant

FF 0.356** (2.145) 0.419*** (3.166) 0.280*** (2.833) 0.389*** (2.990) 0.335** (2.151) 0.411** (2.200) 0.244*** (3.211) 0.291** (2.224)
ESG 0.024*** (3.739) 0.033** (2.368) 0.017*** (3.222) 0.051** (2.111) ​ ​ ​ ​
MC ​ ​ ​ ​ − 0.331** − 0.489** − 0.247*** − 0.356**
(− 2.100) (− 2.094) (− 3.450) (− 2.102)
FF×ESG − 2.450*** − 3.111*** − 2.110*** − 1.879*** ​ ​ ​ ​
(− 3.378) (− 3.560) (− 4.134) (− 3.999)
FF×MC ​ ​ ​ ​ 0.289** (2.341) 0.290** (2.350) 0.238** (2.145) 0.311** (2.397)
Control × × ✓ ✓ × × ✓ ✓
Year ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
Individual ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
R2 0.229 0.181 0.234 0.189 0.195 0.203 0.244 0.188
N 18654 18654 18654 18654 18654 18654 18654 18654

on financial flexibility, as ESG investments themselves may yield long- financial flexibility to support green innovation activities in order to
term innovation benefits, thereby partially substituting for the direct gain a competitive edge. Hypothesis 5 is supported. The effects of
impetus that financial flexibility provides to CGIP. Hypothesis 4 is thus moderation are illustrated in Figs. 4 and 5.
supported. The moderation effects are depicted in Figs. 2 and 3.
Models (5)–(8) of Table 4 show that the interaction term between
corporate financial flexibility and market competitiveness is signifi­ 5.5. Robustness tests
cantly negatively correlated with CGIP (Patent, Grant) (β = 0.238, p <
0.05; β = 0.311, p < 0.05). This result suggests that as the degree of 5.5.1. Endogeneity treatment
market competition increases, the impact of financial flexibility on CGIP
intensifies, meaning that market competition strengthens the positive (1) Instrumental variable method. The instrumental variable method
connection between financial flexibility and CGIP. This indicates that effectively addressed endogeneity issues arising from bidirec­
intensified market competition leads to increased resource scarcity, tional causality and omitted variables. Adopting the methodology
necessitating that firms utilise their limited resources more effectively to suggested by Goldsmith-Pinkham et al. (2020), this study utilised
achieve green innovation objectives. Financial flexibility is particularly the product of the average financial flexibility and growth rate of
crucial in this context, as it enables firms to optimise resource allocation other firms in the same industry from the previous year as the
and ensure that innovation activities are adequately funded. In highly instrumental variable (IV). The fundamental idea was to simulate
competitive market environments, firms face greater pressures for sur­ historical estimates based on the initial share composition of the
vival and development. This pressure compels firms to actively leverage analytical unit and the overall growth rate. The regression find­
ings presented in columns (1) and (2) of Tables 5 and 6 showed

9
S. Ma and A. Appolloni Journal of Environmental Management 387 (2025) 125869

Table 5
Robustness test — CGIP as measured by Patent.
Variable (1) (2) (3) (4) (5) (6) (7) (8) (9)

2SLS Heckman System GMM Explanated Sample Explanatory Tobit

variables reduction variables
Stage 1 Stage 2 Stage Stage 2
1

FF ​ 2.342*** ​ ​ 0.660*** 0.330** (2.226) 0.267*** 0.440*** (4.188) 0.454**

(3.550) (3.488) (2.879) (2.313)
L.Patent ​ ​ ​ ​ 0.239*** ​ ​ ​ ​
(2.382)
IV − 1.891*** ​ ​ ​ ​ ​ ​ ​ ​
(− 3.983)
IMR ​ ​ ​ 0.552*** ​ ​ ​ ​ ​
(3.322)
Control ✓ ✓ ✓ ✓ ​ ✓ ✓ ✓ ✓
Year ✓ ✓ ✓ ✓ ​ ✓ ✓ ✓ ✓
Individual ✓ ✓ ✓ ✓ ​ ✓ ✓ ✓ ✓
R2 – 0.184 0.234 – ​ 0.256 0.330 0.344 0.255
F value 1124.654 217.622 ​ ​ ​ ​ ​ ​ ​
Wald chi2 ​ ​ ​ 798.120 ​ ​ ​ ​ ​
Prob > Wald chi2 ​ ​ ​ 0.000 ​ ​ ​ ​ ​
Over-identification ​ 0.000 ​ ​ ​ ​ ​ ​ ​
test p-value
Cragg-Donaid value ​ 712.902 ​ ​ ​ ​ ​ ​ ​
Stock-Yogo threshold 13.118 13.118 ​ ​ ​ ​ ​ ​ ​
value
AR (1) ​ ​ ​ ​ 0.056 ​ ​ ​ ​
AR (2) ​ ​ ​ ​ 0.377 ​ ​ ​ ​
Hansen ​ ​ ​ ​ 0.444 ​ ​ ​ ​
N 18654 18654 18654 18654 16738 18654 18654 18654 18654

Table 6
Robustness test ——CGIP as measured by Grant.
Variable (1) (2) (3) (4) (5) (6) (7) (8) (9)

2SLS Heckman System GMM Explanated Sample Explanatory Tobit

variables reduction variables
Stage 1 Stage 2 Stage Stage 2
1

FF ​ 1.988*** ​ ​ 0.761*** 0.344** (2.229) 1.115*** 0.578*** (3.221) 0.323**

(3.881) (3.760) (2.980) (2.334)
L.Grant ​ ​ ​ ​ 0.555** ​ ​ ​ ​
(2.178)
IV − 0.445*** ​ ​ ​ ​ ​ ​ ​ ​
(− 2.923)
IMR ​ ​ ​ 0.333*** ​ ​ ​ ​ ​
(3.220)
Control ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
Year ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
Individual ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓
R2 – 0.199 0.234 – – 0.222 0.245 0.199 0.223
F value 1313.192 245.087 ​ ​ ​ ​ ​ ​ ​
Wald chi2 ​ ​ ​ 1344.115 ​ ​ ​ ​ ​
Prob > Wald chi2 ​ ​ ​ 0.000 ​ ​ ​ ​ ​
Over-identification ​ 0.000 ​ ​ ​ ​ ​ ​ ​
test p-value
Cragg-Donaid value ​ 712.902 ​ ​ ​ ​ ​ ​ ​
Stock-Yogo threshold 15.914 12.093 ​ ​ ​ ​ ​ ​ ​
value
AR (1) ​ ​ ​ ​ 0.033 ​ ​ ​ ​
AR (2) ​ ​ ​ ​ 0.266 ​ ​ ​ ​
Hansen ​ ​ ​ ​ 0.480 ​ ​ ​ ​
N 18654 18654 18654 18654 16738 18654 18654 18654 18654

that the regression coefficient for financial flexibility was signif­ arising from causal effects, the Heckman two-stage method was
icantly positive at the 1 % level, indicating that even after con­ employed. During the initial phase, the Inverse Mills Ratio (IMR)
trolling for potential endogeneity issues, financial flexibility still was constructed, which was then included in the second stage
positively influenced CGIP, thereby supporting the baseline regression. As seen in columns (3) and (4) of Tables 5 and 6, the
conclusion. regression coefficient for IMR was significant at the 1 % level,
(2) Heckman two-stage method. Since the study sample was surviv­ effectively controlling for the self-selection bias present in the
ing firms and did not take into account firms that did not enter the research sample. Furthermore, after considering sample selection
sample, there may be endogeneity issues caused by sample se­ bias, financial flexibility still exhibited a positive effect on CGIP,
lection. To account for sample selection bias and endogeneity in line with the primary regression outcomes.

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S. Ma and A. Appolloni Journal of Environmental Management 387 (2025) 125869

Fig. 2. Moderating effect diagram (Patent-ESG).

Fig. 3. Moderating effect diagram (Grant-ESG).

Fig. 4. Moderating effect diagram (Patent-MC).

11
S. Ma and A. Appolloni Journal of Environmental Management 387 (2025) 125869

Fig. 5. Moderating effect diagram (Grant-MC).

(3) System GMM method. Given that the transformation of corporate (1) Alternative dependent variables. This article used the total
green innovation performance requires a time period, green number of green utility model patent applications and design
innovation in a given year is not only determined by current patent applications as an alternative measure of CGIP. The find­
performance but is also influenced by the stock of green inno­ ings, shown in column (6) of Tables 5 and 6, indicated that the
vation from previous years (Li et al., 2024). To control for the regression coefficient for financial flexibility was positive at the 5
intrinsic impact of green innovation performance itself, the % level, confirming the significant promotional effect of financial
model included a one-period lag of green innovation perfor­ flexibility on CGIP, thereby demonstrating good robustness and
mance. Consequently, a dynamic panel regression model was reliability.
established as equations (14) and (15): (2) Sample reduction. Compared to firms in other industries,
∑ manufacturing firms typically exhibit a stronger motivation for
Patent i,t = α0 + α1 FFi,t− 1 + α2 Patent i,t− 1 + α3 Controls i,t + μi + θt dual innovation, resulting in more intense innovation investment
+ εi,t activities. Given the unique nature of innovation investment ac­
(14) tivities in manufacturing firms, this study reduced the research
sample by excluding manufacturing firms for regression testing.
∑
Grant i,t = α0 + α1 FFi,t− 1 + α2 Grant i,t− 1 + α2 Controls i,t + μi + θt As seen in column (7) of Tables 5 and 6, financial flexibility had a
significant positive effect on CGIP, reinforcing the robustness of
+ εi,t
this study’s conclusions.
(15) (3) Core explanatory variable substitution. The alternative calcula­
The regression results of the model are presented in Model (5) of tion formula for financial flexibility was as follows: Financial
Tables 5 and 6 When employing the system GMM, it is necessary to Flexibility = Cash Holdings +0.715 × Accounts Receivable
assess the validity of the instrumental variables through over- +0.547 × Inventory +0.535 × Fixed Assets - Liabilities/Total
identification tests. The p-values of the Hansen tests were all greater Assets. The estimation results are presented in column (8) of
than 0.1, indicating that the null hypothesis could not be rejected. This Tables 5 and 6, where the coefficients for financial flexibility
suggests that the selection of instrumental variables in the system GMM were 0.440 and 0.578, both positive at the 1 % level, in line with
model was valid and that there was no over-identification issue. Addi­ the primary regression findings.
tionally, the Arellano-Bond test was used in the system GMM model to (4) Model substitution. The baseline regression model utilised OLS.
examine the autocorrelation of the random disturbance term. The AR (1) Due to the presence of both zero-inflated and continuously
and AR (2) tests were conducted to investigate whether the residual distributed positive values in the dependent variable of CGIP, a
terms of the differenced model exhibited first-order and second-order panel Tobit model was employed for robustness testing. The
serial correlation, respectively. The p-values of the AR (1) tests were estimation results in column (9) of Tables 5 and 6 indicated that
all less than 0.1, while the p-values of the AR (2) tests were all greater the coefficients for financial flexibility were 0.454 and 0.309,
than 0.1. This indicates that there was no second-order serial correlation both positive and significant at the 5 % level, which aligned
in the residuals of the system GMM model, and the model was deemed to compared to the initial regression findings.
be reasonably and effectively specified. The test results revealed that the
regression coefficient of financial flexibility was significantly positive at 6. Heterogeneity test
the 1 % level. The lagged variables L.Patent and L.Patent also had a
positive impact on green innovation performance. This demonstrates 6.1. Nature of ownership
that financial flexibility has a significant positive effect on corporate
green innovation performance. The conclusion remains robust. This research segmented the sample into two distinct groups: state-
owned enterprises (SOE) and non-state-owned enterprises (NSOE) for
5.5.2. Additional robustness tests estimation (He et al., 2015). As indicated in columns (1) and (2) of
Besides the aforementioned endogeneity treatments, further Tables 7 and 8, financial flexibility did not have a significant regression
robustness tests were conducted: coefficient in the group of SOE, whereas in the group of NSOE, the
regression coefficient for financial flexibility on CGIP was significantly
positive at the 5 % level. This finding indicates that, compared to SOE,

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S. Ma and A. Appolloni Journal of Environmental Management 387 (2025) 125869

Table 7
Heterogeneity test results — CGIP as measured by Patent.
Variable (1) (2) (3) (4) (5) (6)

SOE NSOE Eastern Central and western High-tech Non-high-tech

FF 0.423 (1.419) 0.387** (2.331) 0.311*** (2.955) 0.166 (1.321) 0.209*** (3.009) 0.056 (1.456)
Control ✓ ✓ ✓ ✓ ✓ ✓
Year ✓ ✓ ✓ ✓ ✓ ✓
Individual ✓ ✓ ✓ ✓ ✓ ✓
R2 0.246 0.198 0.212 0.218 0.184 0.220
N 7974 10680 6086 12568 8598 10056

Table 8
Heterogeneity test results——CGIP as measured by Grant.
Variable (1) (2) (3) (4) (5) (6)

SOE NSOE Eastern Central and western High-tech Non-high-tech

FF 0.229 (1.228) 0.315** (2.025) 0.440*** (3.595) 0.288 (1.595) 0.384*** (3.241) 0.070 (1.389)
Control ✓ ✓ ✓ ✓ ✓ ✓
Year ✓ ✓ ✓ ✓ ✓ ✓
Individual ✓ ✓ ✓ ✓ ✓ ✓
R2 0.189 0.234 0.180 0.212 0.156 0.233
N 7974 10680 6086 12568 8598 10056

financial flexibility has a more pronounced positive influence on the wholesale and retail trade, can sustain operations without participating
CGIP of NSOE. On one hand, SOE tend to maintain lower levels of in green innovation behaviors. In contrast, high-tech industries are
financial flexibility reserves, with greater considerations and restrictions characterised by knowledge and technology intensity, product diversi­
on investing in innovative projects, thereby impeding the timely con­ fication, and rapid innovation cycles, necessitating product innovation
version of financial flexibility into funding for innovation activities. to secure a competitive edge in a fierce market. Following the classifi­
Conversely, NSOE encounter heightened market competition. To cap­ cation criteria of Dziurski and Sopińska (2020), the sample was divided
ture a larger market share, they need to improve their financial condi­ into high-tech and non-high-tech enterprises. The findings in columns
tions and enhance their risk resilience. Consequently, the senior (5) and (6) of Tables 7 and 8 indicate that financial flexibility signifi­
management teams of NSOE are prone to engage more proactively in cantly enhances the CGIP of high-tech enterprises, while for
green technological innovations that contribute to sustainable devel­ non-high-tech enterprises, the regression coefficient for financial flexi­
opment, thereby establishing an environmentally friendly corporate bility was not significant. This aligns with expectations: firstly, high-tech
image and enhancing corporate value. industries are characterised by high knowledge density, competition,
and profitability, with enterprise development and value heavily reliant
6.2. Differences in geographic location on cutting-edge innovation, presenting better investment opportunities
and prospects for growth amid the transition of China’s economic
China’s regional economic advancement is uneven, with significant growth model. Secondly, high-tech industries are capital, knowledge,
differences in financial management and R&D innovation behaviours and technology-intensive, imposing higher demands on the financial
between enterprises in the eastern and central/western regions. This flexibility and financing channels of enterprises within the sector.
study examined whether the influence of financial flexibility on CGIP
varies significantly across regions (Yi et al., 2022). By categorising the 6.4. Distinction between cash flexibility and debt flexibility
sample into enterprises in the eastern region and those in the central/­
western region based on geographical location, Tables 7 and 8, columns The analysis categorized financial flexibility into two divisions: cash
(3) and (4), reveal that financial flexibility has a markedly different flexibility (CF) and debt flexibility (DF). Table 9, Column (1), displays
influence on CGIP in various regions. In the eastern region, the regres­ the findings from the baseline regression. In column (2), the coefficient
sion coefficient for financial flexibility on innovation performance was for cash flexibility was estimated to be significantly positive at the 1 %
positive at the 1 % level. In the economically less developed central/­ significance level, indicating that excess cash holdings enhanced
western region, however, the regression coefficient for financial flexi­ corporate innovation performance. This effect can be attributed to
bility did not pass the significance test. This study posits that the eastern several factors. First, reserves of financial flexibility can effectively
region, characterised by higher levels of economic and financial devel­ improve a firm’s internal financing capacity, smooth out R&D in­
opment, along with more sophisticated supporting infrastructure for vestments, ensure the continuity of R&D expenditures, and avoid high
technological innovation, enables enterprises to effectively leverage adjustment costs. Drawing on the pecking order theory of financing and
their financial flexibility reserves to enhance both preventive and utili­ considering differences in capital costs along with the derived effects of
tarian attributes, thus improving the level of green patent applications. equity financing, investments in innovative projects heavily depend on
In contrast, enterprises in the central/western region still need to internal financing. Second, high uncertainty and information asymme­
enhance external innovation environments concerning labour quality, try lead firms with substantial R&D investments to increase their excess
market maturity, and legal frameworks. cash holdings. The information asymmetry theory posits that fund
providers are at a disadvantage due to a lack of understanding of the
6.3. Industry sector operational conditions. The asset specificity and high confidentiality of
R&D funds further exacerbate internal and external information asym­
The operational scope of an enterprise’s industry is often closely metries, which can result in firms facing difficulties in securing external
related to its R&D intensity. Industries outside of high-tech sectors, financing for innovation. With internal funding support, this conflict can
including agriculture, forestry, animal husbandry, fishing, as well as be effectively resolved. Moreover, cash flexibility can effectively

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S. Ma and A. Appolloni Journal of Environmental Management 387 (2025) 125869

Table 9
Results of the test to distinguish between cash flexibility and debt flexibility.
Variable (1) (2) (3) (4) (5) (6)

Patent Grant Patent Grant Patent Grant

FF 0.534*** (3.322) 0.418*** (2.898) ​ ​ ​ ​

CF ​ ​ 1.110*** (3.210) 1.225*** (3.466) ​ ​
DF ​ ​ ​ ​ 0.786** (2.121) 0.665** (2.288)
Control ✓ ✓ ✓ ✓ ✓ ✓
Year fixed effect ✓ ✓ ✓ ✓ ✓ ✓
Individual fixed effect ✓ ✓ ✓ ✓ ✓ ✓
R2 0.278 0.310 0.222 0.354 0.222 0.188
N 18654 18654 18654 18654 18654 18654

safeguard a firm’s R&D secrets, thereby protecting the exclusivity of financial flexibility on CGIP, while also investigating the underlying
innovative outcomes. mechanisms and moderating effects. The primary findings can be sum­
In column (3), The debt flexibility’s regression coefficient stood at marized as follows: (1) Financial flexibility has a positive effect on CGIP.
0.222, significant solely at the 10 % level. This indicates that the positive Both cash flexibility and debt flexibility contribute to enhancing CGIP,
impact of debt flexibility on CGIP was less pronounced than that of cash with cash flexibility demonstrating a more pronounced effect. (2)
flexibility. Several reasons may explain this finding. First, debt financing Financial flexibility primarily enhances CGIP by reducing enterprise
contracts typically require principal and interest repayments, creating a risk-taking and increasing non-efficiency investment. (3) Corporate ESG
disparity between the returns and risks faced by creditors and share­ performance negatively moderates the connection between financial
holders. As a result, creditors often demand additional guarantees, flexibility and CGIP, while market competitiveness positively moderates
impose more restrictive covenants, or adjust debt contracts to mitigate this relationship. (4) The impact of financial flexibility on CGIP exhibits
asset loss risks. This increases the external financing costs for firms and heterogeneity, it is more effective in promoting CGIP in non-state-owned
constrains their autonomy in the use of funds, thereby limiting their enterprises, firms in eastern regions, and companies in high-tech
enthusiasm for innovation. Second, due to insufficient innovation in­ industries.
centives and the inability to bear the risks of insolvency, bankruptcy This research provided microeconomic foundations for building
crises, and job insecurity associated with failed R&D projects, executives economic resilience and established that cash flexibility, compared to
may exhibit a lack of preference for high-risk innovation initiatives. debt flexibility, offered more practical insights for enhancing green
Finally, while maintaining low financial leverage can alleviate financing innovation performance. It simultaneously furnished scientific evidence
barriers, the associated high-interest costs can squeeze a firm’s opera­ for government design of financial support policies, improvement of
tional cash flow, particularly for firms with high R&D intensity. The dual ESG information disclosure evaluation systems, and formulation of
risks of innovation investment and debt financing may further elevate regional coordinated development strategies. These findings not only
the risk of bankruptcy for these firms. assisted investors in identifying high-value enterprises but also estab­
lished a framework for developing market competition strategies and
7. Conclusion and future perspectives improving enterprise value assessment models, demonstrating signifi­
cant practical implications for promoting economic green trans­
7.1. Conclusions and recommendations formation and strengthening international competitiveness. Based on
these conclusions, the following policy recommendations were
As the complex external environment continues to evolve, firms must proposed:
closely observe and understand their surroundings in order to identify
opportunities and threats. Through rational analysis, they are then able (1) Government-level recommendations
to develop optimal responses that align with the realities of their envi­
ronment. A number of scholars have already recognised the relationship Firstly, governments could encourage enterprise investment in green
between the economic environment and organisational strategy. LePine innovation projects through fiscal policies, such as tax incentives,
and King (2010) introduced the concept of “response ability” into the financial subsidies, and low-interest loans, which would reduce corpo­
field of strategic management research and were among the first to rate financial costs and enhance project feasibility and attractiveness.
propose the flexible strategy theory. This theory posits that firms can Secondly, governments should establish more comprehensive ESG in­
quickly and economically adapt to environmental changes through formation disclosure evaluation systems, strengthen regulatory over­
defensive or aggressive strategies, thereby developing the capacity to sight, and intensify penalties for ESG violations to maintain market
reduce organisational uncertainty. Bolisani and Bratianu (2017) argued order and public interests. Thirdly, governments should facilitate the
that firms should continuously integrate internal and external resources conversion of enterprise green innovation outcomes and bolster support
to enhance their ability to cope with various uncertainties. Although the for green innovation and environmental technology research and
issue of financial flexibility has a long history, there is still no unified development. Governments should provide financial support to guide
and authoritative definition to date. Building on the theoretical enterprises, research institutions, universities, and other stakeholders to
achievements of predecessors, this study explores how financial flexi­ actively participate in green innovation and environmental technology
bility can adjust financial resources in a dynamic business environment research and development, promoting breakthroughs and applications
to maintain the balance of internal and external resources required for in green technology, thereby providing robust support for economic and
operating or investment activities and effectively enhance the compet­ social sustainable development.
itive advantage of firms. In short, proactively improving financial flex­
ibility not only helps firms to engage in green innovation, gain a (2) Company-level recommendations
competitive edge and boost organisational performance, but also en­
ables them to take a more active role in dealing with environmental Firstly, listed companies should establish scientifically efficient
uncertainties in the future and sustain continuous innovation activities. financial flexibility reserve systems, optimise cash holding levels, and
This research, utilizing micro panel data from A-share listed com­ rationally allocate remaining debt financing capacity to enhance their
panies in China between 2012 and 2022, analysed the impact of research and development innovation performance. Secondly, dynamic

14
S. Ma and A. Appolloni Journal of Environmental Management 387 (2025) 125869

monitoring mechanisms for listed company operational risks should be Declaration of competing interest
established, setting risk regulatory thresholds to control operational
risks within reasonable ranges, thereby strengthening enterprise risk- The authors declare that they have no known competing financial
bearing capacity. interests or personal relationships that could have appeared to influence
the work reported in this paper.
(3) Management-level recommendations
Acknowledgments
Firstly, managers should appropriately optimise financial strategies.
Enterprise managers should incorporate financial flexibility into their Dr. Andrea Appolloni acknowledges the funding of this study sup­
overall strategic planning, considering their life cycle stage and different ported by the European Union—NextGenerationEU in two projects: (1)
internal and external contexts to formulate financial strategies tailored the first project in the framework of the GRINS—Growing Resilient,
to local conditions, thus maximising the promotional effect of financial Inclusive and Sustainable Project (GRINS PE00000018—CUP
flexibility on enterprise green innovation. Secondly, investment in green E83C22004690001) and (2) the second project in the framework of the
technology innovation should be increased. Enterprise managers should ECS 0000024 Rome Technopole—CUP B83C22002820006, NRP
fully utilise their talent, technology, and resource advantages to accel­ Mission 4 Component 2 Investment 1.5.
erate the research, development, and application of green technology,
continuously enhancing the environmental performance of products and Data availability
services to meet societal demands and expectations for achieving dual-
carbon goals. Additionally, enterprise managers should establish effec­ Data will be made available on request.
tive communication mechanisms to promptly respond to stakeholder
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