Liquidity-Based Tax Incentives and Corporate Green Innovation: Evidence from China’s VAT Credit Refund Policy

Tax incentives are central to environmental policy, yet the innovation effects of liquidity-based fiscal instruments remain underexplored. This study asks whether China’s value-added tax (VAT) credit refund promotes corporate green innovation, and how firm governance and the policy environment condition that effect. Exploiting the 2018 industry-targeted pilot as a quasi-natural experiment, we estimate two-way fixed-effects difference-in-differences models on 25,259 firm-year observations for 4044 Chinese A-share listed firms over 2014–2021, measuring green innovation by invention-patent applications and defining treatment by industry eligibility. The refund raises green invention-patent applications by 17.0 percent, significant at the 1 percent level. A sequential decomposition is consistent with transmission through eased financing constraints and higher R&D investment. The effect is stronger where internal control quality is higher and pre-treatment financial slack is greater, and is absent where climate policy uncertainty (CPU) is high. Results survive removing control firms drawn in by the 2019 policy expansion, sector-by-year and province-by-year fixed effects, heterogeneity-robust estimators, and a triple difference on the innovation-quality margin. Fiscal liquidity complements governance quality and regulatory predictability rather than substituting for them.