Carbon Emission Intensity and Investment Efficiency in the European Union: The Moderating Role of Analyst Coverage and Environmental Innovation

This study examines the impact of carbon emission intensity (CEI) on investment efficiency (IE) as well as the moderating role of analyst coverage and environmental innovation in this relationship for firms operating in the European Union (EU). A panel data set consisting of 5,501 observations of 931 firms for the period 2008-2023 is used. Empirical analyses conducted using the OLS method estimated with Driscoll-Kraay standard errors show that CEI has an overall negative effect on IE, and this effect is particularly pronounced for firms that over-invest. These main findings are robust to alternative investment efficiency measures and alternative estimation methodologies. In addition, analyst coverage and environmental innovation exacerbate the negative effect of CEI on IE. Last, heterogeneity analyses indicate that the negative effect of CEI on IE is stronger for firms with lower levels of green revenue and those not participating in the Emissions Trading System (ETS). The study reveals that policies to increase IE should be designed by taking into account firm- and sector-level conditions.