Green Financial Innovation and Firms' Green Total Factor Productivity

Abstract Green financial innovation policies play an important role in improving firms' green total factor productivity (GTFP) and balancing environmental protection with economic growth. Using firm‐level data from China, this study examined the effect of green financial innovation policy on GTFP and explored the underlying mechanisms. A difference‐in‐differences approach was applied to evaluate policy effectiveness. The results indicate that this policy significantly increased firms' GTFP, with findings robust across multiple checks. Mechanism analysis indicated that internal governance channels improved GTFP by strengthening executives' environmental decision‐making, encouraging green technological innovation, and enhancing environmental governance. External governance channels exerted their effects through alleviating financing constraints and improving market competitiveness. Substantial heterogeneity in policy effects was also identified across firms. These findings provide valuable insights into the optimization and targeted implementation of green financial innovation policies and highlight their role in supporting firms' green transformation and broader sustainable development objectives.