The Downside of Green Innovation: How Green Patents Affect Corporate Value and Profitability in Japanese Manufacturing Firms 

Abstract: 

This study examines the relationship between climate-oriented innovation and equity market valuation in Japanese manufacturing firms. In response to increasing regulatory and societal pressure to address climate change, firms in the manufacturing sector are expected to invest in technologies that contribute to environmental sustainability. To evaluate firm-level green innovation, we construct a Green Transformation Score (GXS) using a proprietary scoring method. Using panel data on publicly listed manufacturers in Japan, we find that a higher GXS is associated with a statistically significant decline in stock market valuation and accounting profitability. This negative association likely stems from the relatively small share of green patents within the firm’s overall innovation portfolio and from investors focusing more on the broader patent base than on its environmental subset. However, further analysis reveals that in several manufacturing industries, the GXS has a positive and significant effect on equity value. This suggests that investors recognize the strategic and financial relevance of green innovation in specific contexts.