Government subsidy, asymmetric information and green innovation

Abstract

The presence of asymmetric information exists between firms and the government about the firms' green innovation; this may lead to the firm's moral hazard problem of misusing the government subsidy on the green innovation. Such a problem is not fully considered by the existing literature. The purpose of this study is to explore how government subsidy affects green innovation when the information of firms' innovation cannot be completed observed, and figure out the mechanisms that can alleviate the negative impact of information asymmetry, which helps to explain the factors that motivate the firms to actively engage into the green innovation with the government subsidy. In a theoretical model under imperfect information in which the firm's activity on green innovation may not be fully observed, the firm could be either altruistic or not; an altruistic firm has stronger incentive to engage into corporate social responsibility (CSR) activities such as green innovation. With the presence of asymmetric information, the authors analyze the possibility of a firm's moral hazard and try to find out the condition on the information quality that can avoid such problem. To examine the results of theoretical analysis, the authors use the data of Chinese listed companies in a corresponding empirical analysis. On the basis of both theoretical and empirical the authors try to figure out the effect of the government subsidy on the green innovation by enterprise and the role of firm's characteristics of social responsibility and information quality in the green innovation with the government subsidy. The results show that the government subsidy can promote the firm's green innovation, especially for those that are more socially responsible. The asymmetric information, however, leads to inefficiency on the green innovation. This is because that the low-quality information about the firm's behavior raises the possibility of a moral hazard. Moreover, the analyst coverage could be an efficient way to improve the quality of information, alleviating the moral hazard problem of the firm's green innovation. The main contribution is to fill the gap in the study of the government subsidy on green innovation under asymmetric information and to provide the mechanism to improve the efficiency of the subsidy to motivate green innovation by enterprise. A crucial implication to policymakers is to complete and improve the system of information in the market, which can form an efficient incentive compatibility between the enterprises and the public. Such incentive compatibility can attract the enterprises to better use the government subsidy into green innovation and receive a long-run return from the public's positive feedback for their contribution on the social good. Existing studies are concerned about antecedents of green innovation do not completely focus on the relationship between government subsidy and green innovation. The present paper considers that information asymmetry between the government and firms may affect the impact of government subsidy on the firms' green innovation. This conjecture is studied by the theoretical model and verified by an empirical analysis using the data of Chinese listed companies. Additionally, the empirical analysis explores the moderating effect of CSR characteristics of firms, and the analyst coverage can positively affect the promotion of the government subsidy on the firms' green innovation.