Exploring the catalysts of eco-innovation: Employee ownership and sustainable practices

Climate change is a critical and urgent issue worldwide. Green innovation is a key means of abating carbon emissions. Our study investigates whether and how employee stock ownership plans (ESOPs) affect corporate green innovation. Using a powerful difference-in-differences approach, we provide causal evidence of the positive effect of ESOPs on corporate green innovation. Our baseline results are robust after addressing potential endogeneity issues using an entropy balancing technique, a Heckman two-stage model, and a placebo test, and after including an industry effect and different model specifications. Our channel analyses reveal that ESOPs mainly promote green innovation through increased risk-taking ability and employee productivity in green innovation. We find that the positive effects are more pronounced when firms are not state-owned, have less powerful CEOs, and are in heavily polluting industries. In addition, we find that companies with increased green innovation after adopting ESOPs have better environmental performance than other firms.