Energy Reports 6 (2020) 2667–2675

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Energy Reports
journal homepage: www.elsevier.com/locate/egyr

The role of innovation investment and executive incentive on financial

sustainability in tech-capital-labor intensive energy company:
Moderate effect
∗
Xin Long Xu a,b , Tao Shen c , Xi Zhang d , Hsing Hung Chen e ,
a
College of Tourism, Hunan Normal University, Changsha, Hunan, 410081, China
b
Institutes of Science and Development, Chinese Academy of Sciences, Beijing 100190, China
c
The Institute for Sustainable Development, Macau University of Science and Technology, Taipa, Macau, China
d
School of Economics, Beijing Technology and Business University, Beijing 100048, China
e
School of Business, Macau University of Science and Technology, Taipa, Macau, China

article info a b s t r a c t

Article history: As an essential way to alleviate the principal–agent issue, the executive incentive not only guides the
Received 2 August 2019 innovation activities but also affects the financial performance of enterprises. In conjunction, senior
Received in revised form 22 July 2020 managers are the core personnel of enterprise operation and hold strategic decision-making power.
Accepted 13 September 2020
Therefore, this paper aims to explore the bidirectional relationship between innovation investment
Available online 5 October 2020
and financial sustainability and the moderate effect of executive incentive in the energy industry. The
Keywords: results show that innovation investment has heterogeneity effects on business performance in different
Innovation investment (INI) type energy companies on different periods. In other hands, salary incentive has a significant positive
Financial sustainability (FS) moderate impact on the relationship between innovation investment and financial sustainability,
Executive incentive (EXI) especially in technology-intensive companies. Equity incentive does not show significant moderate
Endogenous relationship
effect in the whole sample and sub-sample. This paper proposes a new research perspective on the
Energy sector
relationship between innovation investment and financial sustainability, which has a practical signif-
icance to weigh innovation expenditure and corporate target performance and design an executive
incentive mechanism.
© 2020 The Author(s). Published by Elsevier Ltd. This is an open access article under the CC BY license
(http://creativecommons.org/licenses/by/4.0/).

1. Introduction by the subjective choice of management. In the decision-making

of weighing short-term interests and long-term development,
As the Chinese economy enters a new stage of high-quality management incentives can have an important impact on inno-
development, the traditional extensive development model no vative decision-making behaviors such as innovation investment
longer meets the needs of society (Xu and Chen, 2020c). In 2019, (Crowley and Jane, 2018). It can alleviate agency and manage-
China’s ‘‘Government work report’’ pointed out that ‘‘promote the ment defense, make executives’ interests converge with corporate
reform of energy production and consumption, construct a clean, interests, so as to stimulate management’s innovation motivation
low-carbon, safe and efficient energy system, market-oriented and improve corporate sustainability performance (Qiao et al.,
green technology innovation system’’. Energy enterprises as an 2016).
important micro subject of green technology innovation (Xu and First of all, the existing literature holds that INI can improve
Chen, 2020a; Xu et al., 2019a), its ultimate goal of innovation corporate FS (Plank and Doblinger, 2018; Xu et al., 2019b; Yunis
investment is to maximize enterprise value, Vanderpal (2015) et al., 2018). However, there is few literatures focus on explor-
believe that innovation investment (INI) can significantly im- ing whether the intensity of INI can be sustained and whether
prove financial sustainability (FS), which is an important factor to the current performance target will lead to the short-sighted
improve enterprise productivity and profitability. However, tech- behavior of management to reduce innovation expenditure with
nological innovation has the characteristics of a long cycle, high the improvement of corporate performance (He et al., 2018;
risk and lagged return (Li et al., 2020a,b,c, 2015; Sun et al., 2020; Hodson et al., 2018; Miao et al., 2018). Based on the principal–
Wei et al., 2019), it is difficult for the company to achieve rapid agent theory and the management defense hypothesis, in the
growth in the short term. Innovation and R&D is largely affected environment of information asymmetry, managers may choose
non-corporate value maximization behaviors that are beneficial
∗ Corresponding author. to their own positions and interests (van Dun et al., 2017; Xu
E-mail address: [email protected] (H.H. Chen). and Chen, 2020b). Financial performance appraisal is often one

https://doi.org/10.1016/j.egyr.2020.09.011
2352-4847/© 2020 The Author(s). Published by Elsevier Ltd. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).
X.L. Xu, T. Shen, X. Zhang et al. Energy Reports 6 (2020) 2667–2675

of the key indicators to determine whether the management conclusion about the relationship between the two. Most scholars
will promotion or fired (Evans and Tourish, 2017; Xu et al., believe that there is a positive correlation between the two.
2020b), therefore, the management will increase the enterprise From the perspective of INI, it has a positive effect on FS.
profit and cut the operation costs to achieve the present target Scholars used the Cobb–Douglas (C–D) production function model
performance (Xu et al., 2020a). This phenomenon will induce to measure the impact of INI on productivity. For instance, Gril-
managers to reduce the uncertain current cash expenditure such liches (1986) studied the innovation activities of large manufac-
as INI to achieve the financial performance, thus endangering the turing companies in the United States and found that INI can
long-term development goals of the enterprise. Therefore, it is significantly improve the productivity and bring higher yields.
necessary to study the bidirectional relationship between FS and Hall and Mairesse (1995) found that INI is correlated with pro-
INI. ductivity and enables companies to achieve excessive returns.
Secondly, the attitude of senior managers plays a leading In order to make better comparative analysis, Chambers et al.
role in the decision-making of innovation activities. An effective (2002) divided the sample companies into two types, one with
executive incentive (EXI) mechanism is a necessary guarantee INI and one without. Results showed that the one type with INI
for INI and company operation. Because the income of man- had outstanding performance in the next ten years and received
agers mainly comes from short-term compensation returns and excessive returns. Wang et al. (2005) concluded that there is
the compensation returns depend on the short-term operating a significant positive correlation between the intangible assets
performance (Bennett et al., 2017; Miller and Xu, 2019), while formed by the INI and the future performance in China. Based
managers is often reluctant to innovate R&D projects with risk on the intertemporal and cumulative effect of economic returns
uncertainty. Therefore, how improve the risk-taking ability and from INI, Stam and Wennberg (2009) found that INI plays a
willingness of senior managers to increase the core competitive- very important role in the rapid growth of the performance of
ness of enterprises is an important choice for shareholders. In start-ups. Guan and Chen (2010) believed that the INI of high-
recent years, many researches focus on the impact of equity tech industry promoted the growth of long-term productivity
incentive (EI) and salary incentive (SI) on INI and FS are increasing and increased product sales revenue. From the perspective of
(Lui et al., 2016; Xu et al., 2019b), but the conclusions are not corporate life cycle, Liang et al. (2010) found that the INI of the
consistent. growth companies has a significant impact on the current period
Last but not least, there are differences in the factors of in- corporate performance and will produce a cumulative effect in
novation activities in different energy companies (Chen et al., the long run. Saunila and Ukko (2014) examined the impact of
2020; Edsand, 2017; Xu et al., 2019c). At present, there is little INI in SMEs on the main business income and found that INI has
literature to discuss the endogenous relationship between INI a positive impact on FS. Based on the perspectives of different
and sustainable performance of energy companies. Therefore, for industries, existing studies mainly focus on high-tech companies
the energy company with different production factor intensity, is (Guan and Chen, 2010), IT companies (Kleis et al., 2012), and
there any difference in the economic return brought by INI? How heavy polluting companies (Cole et al., 2008). They found that the
can sustainable performance moderate the timing and intensity INI has an obvious promoting effect on FS in these industries.
of INI? Is the impact of different EXIs on INI and sustainable per- Whether the FS has a reverse effect on INI? Janošová and
formance consistent? The discussion of these issues is beneficial Jirásek (2017) found that the long-term performance of compa-
to extend the research of innovation performance literature at the nies has a reverse effect on INI, especially when the corporate
industry and enterprise level and has practical significance for the performance does not reach the historical level or peer level,
transformation and upgrading of energy companies in China. and it will generate the incentive to increase INI. Based on the
To contribute the existing literature, first, this paper empiri- consideration of short-term performance goals, some scholars
cally studies the bidirectional endogenous relationship between proposed the short-sighted behaviors of corporate INI. Baber et al.
INI and FS of energy companies, which fill the gap that the (1991) concluded that managers have a strong motive for short-
existing studies only consider the one-way effect of INI on FS, term behaviors when the company could not realize the target
while ignoring the reverse moderate effect of the latter. Second, profits, and they may choose to improve corporate performance
cluster analysis is carried out according to the intensity of pro- by reducing INI. A few scholars have also begun to explore the re-
duction factors to control the characteristics of the industry and lationship between INI, corporate performance, and market value
refines the research field, which has a practical significance for (Dos Santos et al., 1993; Hall and Oriani, 2006; Toivanen et al.,
the innovation practice of the energy industry. Finally, this paper 2002). They believe that a positive R&D strategy is the premise
applied the Three-Stage Least Squares (3SLS) of Simultaneous of good corporate performance and high market value, while
Equations Method (SEM), which can not only control the endo- good performance and high market value are the guarantees for
geneity in variables, but also exclude the subjectivity in selecting continuous investment in R&D. At the same time, some scholars
instrumental variables (IVs), making the empirical results more have studied the relationship between INI and the increase of
realistic and robust. This paper is organized as follows: the second return on assets (Artz et al., 2010). It is found that managers will
part is literature review and hypotheses, and the third part is the consider the changes in the current period ROA before the R&D
methodology, we select the listed companies of energy sector in investment decision. If the ROA declines, the corporate INI will
the Shanghai and Shenzhen A-share markets from 2009 to 2018 also be cutting down.
as samples, and the fourth part is the empirical results, and the In addition, because different companies have different priori-
final part is the conclusions and suggestions. ties and forms in terms of R&D innovation, the INI will contribute
to the improvement of corporate performance to different de-
2. Literature review and proposed hypotheses grees. For example, for the energy companies with technology-
intensive such as nuclear companies, the development of a com-
2.1. Relationship between innovation investment and financial sus- pany is based on technological innovation, and technological
tainability innovation is the source of life for the company. Therefore, INI has
obvious output benefits. For the energy companies with capital-
There has been a large amount of literature on the theoretical intensive such as hydropower companies, the scale effect may be
and empirical research on the relationship between INI and FS an important strategy for their development. For the energy com-
(Xu and Li, 2019; Xu and Liu, 2020), but there is no unified panies with labor-intensive such as fossil fuel companies, service
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model changes, and management process innovations may bring are more capable of encouraging managers to invest in innovation
more profits to companies. Therefore, different type companies (Cao et al., 2018).
have different INI. We believe that it is necessary to analyze the From the perspective of principal–agent theory, managers
relationship between INI and FS from the industry level. Based on tend to adopt self-interested behaviors that focus on short-term
the above analyses, this paper proposes the following hypotheses. economic benefits based on their own interests, while ignoring
or evading the INI that is conducive to enhancing the company’s
Hypothesis 1. INI has a significantly positive effect on FS, and business sustainability. Therefore, companies must implement
the positive effects in different type companies are different. incentives to enhance the motivation of managers to make R&D
decisions, such as improving manager’s short-term salary or
Hypothesis 2. There is a bidirectional endogenous relationship implementing equity incentive plans, aligning their personal in-
between INI and FS, and FS has a reverse effect on INI, and the terests with corporate interests, and increasing their ability to
reverse effects in different type companies are different. prevent risks. Based on the above analyses, this paper proposes
the following hypotheses.
2.2. The impact of EXI on INI and FS
Hypothesis 3. SI has a significantly positive moderating effect on
In the study of the relationship between INI and FS, scholars the relationship between INI and FS.
found that the two could be affected by the internal and external
business factors, and managers are one of the important influenc- Hypothesis 4. EI has a significantly positive moderating effect on
ing factors. Corporate governance theory shows that shareholders the relationship between INI and FS.
can collect portfolio income through diversified investment while
managers can only obtain salaries, benefits, and other short-term 3. Methodology
returns through business performance. Therefore, managers, es-
pecially risk-averse managers, usually focus only on projects that 3.1. Data source
improve short-term business performance but avoid long-term
innovation R&D projects with risks and uncertainty (Behrens, Since 2007, China has promulgated and implemented the new
2016). Applying the incentive to managers is an effective way ‘‘Accounting Standards for Enterprises’’, which requires enterprises
to encourage the managers to take risks and improve innovation to set up the ‘‘R&D Expenditure’’ subject and disclose information
performance (Dobni et al., 2015). The existing literature mainly on R&D investment. Considering the availability of data and the
divides the executive incentive into salary incentives and equity characteristics of data disclosure of listed companies, this paper
incentives (Lo and Fu, 2016; Maas and Rosendaal, 2016; Zou et al., selected the listed companies of the energy sector with R&D
2015). investment of more than 0 in the Shanghai and Shenzhen A-share
In terms of salary incentives (SI), some scholars believe that SI markets from 2009 to 2018 as samples. Finally, 1520 samples
can effectively curb the principal–agent contradiction and man- were obtained.
ager risk aversion, and enhance the incentives for managers to The CSMAR, RESST, and WIND databases are the most popu-
engage in venture capital projects. Especially in the R&D de- lar databases in China. They are positioned as research-oriented
partment, the higher the managers’ salary level is, the larger databases, serving academic and financial institutions for the
number of patents and the R&D expenditure. After introduc- purpose of research and quantitative investment analysis. These
ing the incentive as moderating variables, scholars studied the databases are the essential tools for investment and empirical
moderating effect of corporate governance on the relationship be- research, which cover the main fields of the Chinese economy and
tween management defense and INI and found that the increase finance such as securities, futures, foreign exchange, and industry.
of managers’ salaries can effectively suppress the investment Therefore, the data were collected from CSMAR, RESST, and WIND
deficiency (Barker III and Mueller, 2002). Lin et al. (2011) found databases.
that the SI for CEOs can significantly promote R&D innovation In addition, we firstly employ Excel Spreadsheet to calculate
while the state-ownership can inhibit the promoting effect of the raw data downloaded from the database into specifically
SI. Alessandri and Pattit (2014) believed that SI has a signifi- defined variables, and secondly applied the SPSS to performs
cant positive moderating effect on the relationship between R&D cluster analysis, and lastly use the Stata to run OLS regression
investment intensity and innovation performance. analysis.
In terms of equity incentives (EI), some studies showed that
EI enables managers to focus on long-term business objectives, 3.2. Cluster analysis
which is conducive to improving the motivation of managers for
R&D (Miller et al., 2002). Zahra et al. (2000) believed that the According to the China Securities Regulatory Commission’s in-
implementation of EI for managers can motivate them to carry dustry classification standards 2012, this paper divided all sam-
out the innovative strategy, because executives’ holdings make ple into three types, that is, the technology-intensive, capital-
them have the same interests with their shareholders. Zhu and intensive, and labor-intensive energy company. We follow the
Zhou (2016) concluded that there is a significant inverted U- classification method of Lu and Dang (2014), this paper selected
shaped relationship between EI and corporate innovation. When the following two variables as classification indicators: fixed
considering the impact of both SI and EI on the relationship assets ratio (net fixed assets/total assets) and R&D expenditure–
between INI and performance, some scholars showed that the salary ratio (R&D expenditure/payable employee salary). We use
effect of SI is obvious, while the effect of EI is not (Lin et al., the wardslinkage method in the cluster analysis to classify sam-
2011). Some scholars believed that the moderating effect of EI ples. First, according to the proportion of fixed assets, companies
is more significant than that of SI (Zhang et al., 2014). Even with a larger proportion of fixed assets belonging to the capital-
some scholars indicated that the managers would not conduct intensive energy company, indicating that the capital is of higher
innovative activities to cater shareholders only because of more importance. Second, in terms of the R&D expenditure–salary
equities or salaries (Saidani et al., 2017). However, some scholars ratio, companies with higher ratios belong to the technology-
also found that compared with EI, political promotion incentives intensive energy company, indicating that the technology is of
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higher importance and others belong to the labor-intensive com- Table 1

pany. The results of cluster analysis are shown in Table 1, indi- The results of cluster analysis.

cating that there are no overall inter-cluster differences for each Enterprise types Samples Fixed assets ratio R&D expenditure ratio

dimension. To ensure the accuracy of the classification results, 0.009 0.356

Technology-intensive 630
(0.354) (0.176)
this paper compares the classification results to that of Lu and
Dang [43], and it proved that the classification results in this 0.021 0.036
Labor-intensive 510
(0.279) (0.216)
paper are reliable.
0.036 0.022
Capital-intensive 380
(0.115) (0.287)
3.3. Variables
Note: () is denote for standard deviation.

3.3.1. Financial sustainability (FS)

The financial sustainability is the maximum growth rate of
operating revenue that can be achieved under the condition that 3.3.3. Executive incentives (EXI)
an enterprise maintains the target operating efficiency and finan- This paper follows the method proposed by Ding et al. (2010)
cial policy without issues new shares. It reflects the ability of an and defines company executives as all directors, supervisors,
enterprise to use resources to obtain income and determine the presidents, managers, and board secretaries. The short-term salary
comprehensive advantages of an enterprise. It also overcomes the incentives (SI) are represented by the total annual salary of
defect that enterprises cannot support the growth of operating executives (in millions CNY), and the long-term equity incentives
revenue in long term by relying on internal funds or external (EI) is represented by the sum ratio of executives’ shareholdings.
funds and emphasizes the idea of balancing between business
income growth and limited resources without exhausting re- 3.3.4. Control variables (c)
sources. This paper employs the model of financial sustainability This paper followed related references (Shahbaz, 2012; Shah-
proposed by Higgins (1981), because it can reflect the issues that baz et al., 2016; Xu et al., 2018) and considered the following
financial factors restricting enterprise growth, and its calculation variables: the company size (Size), represented by the natural
logarithm of the company’s total assets; leverage ratio (Lev),
equation is as follows:
represented by the asset–liability ratio; ownership concentra-
SGR = S × T × P × E (1) tion (Own), represented by the shareholding ratio of the largest
shareholder; the nature of ownership (State), 1 for the state-
Where, SGR, S, T, P, and E are denoted for financial sustainabil- owned company, 0 for non-state-owned company; the proportion
ity, sales margin, total asset turnover, payout ratio, and equity of independent directors (Indep), represented by the proportion
multiplier, respectively. of independent directors in the board of directors; board size
(BS), represented by the natural logarithm of the total number
• Sales margin (S), this indicator reflects the relationship be- of directors; industrial (Industry) and annual (Year) fixed effect.
tween net profit and operating revenue. Increasing the net
interest rate of sales is the key to improve the profit of 3.4. Modeling
the enterprise, and the level of the profit margin of sales
depends on the level of operating cost and expense. There Considering the correlation of random error terms under the
are two ways to increase the sales margin, one is to expand endogenous condition, as well as the subjectivity of instrumental
operating revenue, and the other is to reduce costs and variable selection, we follow Wang and Yang (2017) and used
expenses. the simultaneous equations method to examine the relationship
• Total asset turnover (T), this indicator reveals the compre- between INI and FS and performed 3SLS to build the Model (2)
hensive ability of the enterprise’s total assets to achieve and (3).
operating revenue. In connection with operating revenue, i=l
enterprises should analyze whether the expenditure of total ∑
INIi,t = a0 + a1 FSi,t + a2 FSi,t −1 + a3 FSi,t −2 + θl Ci,t + µi,t (2)
assets is reasonable and whether the proportion of current
i=1
and non-current assets is appropriate. In addition, it is nec- i=m
essary to analyze the internal structure of total assets and
∑
FSi,t = β0 + β1 INIi,t + β2 INIi,t −1 + β3 INIi,t −2 + θm Ci,t + εi,t (3)
the factors that affect the total asset turnover.
i=1
• Payout ratio (P), this ratio related to the profit distribu-
tion policy. How to properly solve the relationship between To explore the impact of EXI on the relationship between INI
short-term interests and long-term interests, and the rela- and FS and avoid the endogenous interaction between INI and FS.
We follow Zhang et al. (2014) and use the dependent variable of
tionship between companies and investors are very impor-
the lag period and the interaction term between INI and EXI to
tant. Enterprises should follow the principle of distribution
examine the impact of EXI and establish the Model (4).
according to law and taking into account all aspects of
interests. FSi,t = γ0 + γ1 INIi,t −1 + γ2 INIi,t −2 + γ3 SIi,t −1 + γ4 EIi,t −1
• Equity multiplier (E), this index is an important indicator of i=n
the stability of the enterprise’s financial structure. It reflects
∑
+ γ5 INIi,t −1 ∗SIi,t −1 + γ6 INIi,t −1 ∗EIi,t −1 + θn Ci,t + ϕi,t
the degree of protection of investors’ rights and interests to i=1
creditors’ rights and interests.
(4)

3.3.2. Innovation investment (INI) 4. Results and discussion

In terms of the form of INI, it includes some investments such
as scientific and technological talents, R&D projects, machinery 4.1. Descriptive analysis
and equipment. This paper uses the proportion of R&D expendi-
ture to operating income to represent the INI (Cumming et al., The descriptive analysis results are shown in Table 2. The
2016). results show that the mean of INI is 0.035, the mean of SI is 6.38
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Table 2 Table 5
Descriptive analysis. The results of OLS and 3SLS regression based on full sample.
Variables Mean Std. Min. Max. OLS estimation 3SLS estimation
FS 0.095 0.063 0.002 0.375 Equation (2) (3) (2) (3)
INI 0.035 0.047 0.001 0.198 Variables INI FS INI FS
SI 6.38 7.537 0.625 31.348 FS t −.081*** .575**
EI 0.113 0.265 0.000 0.743 (−2.15) (2.81)
Size 22.521 1.478 17.894 28.638 FS t −1 .213*** −.602***
Lev 0.559 0.171 0.098 0.917 (3.41) (−5.25)
Own 0.357 0.159 0.035 0.714 FS t −2 −.351 −.309***
State 0.621 0.469 0.000 1.000 (−1.85) (−1.42)
Indep. 0.346 0.057 0.093 0.817 INI t −.155 −1.491***
BS 2.257 0.235 1.423 2.947 (−1.27) (−2.88)
INI t −1 −.099 .251
(−.68) (.97)
Table 3
INI t −2 .079 .088
The correlation analysis.
(.88) (.65)
FS INI SI EI Own State Indep. BS _Cons −0.723 −.371** 2.017 −.038
FS 1 (−0.51) (−7.49) (.71) (−.55)
INI .175*** 1 Controls Yes Yes Yes Yes
SI .381*** .067** 1 Year & Industry Fixed Yes Yes −- –
EI .264** .84*** .085 1 R2 .461 .448 .345 .478
Own .051* −.141** .067** −.117** 1 Adj. R2 .445 .423 −- –
State −.275* −.127** .017 −.229** .261** 1
Note: ***, **, *Significant at 1%, 5%, and 10% levels, respectively; () of 3SLS
Indep. −.081** .005 −.034 .035* .015*** .017 1
estimation and () of OLS estimation represent z value and t value, respectively.
BS −.019 −.065** .241*** −.036* .036*** .165** .032 1

Note: ***, **, *Significant at 1%, 5%, and 10% levels, respectively.

of INI impact on FS, the results show that the current period INI
Table 4
has a significant negative impact on that of FS, which means that
The results of Hausman test.
the increase of R&D expenditure in the current period will reduce
Item Coefficient P value Adj-R2
profits. Meanwhile, the INI of the lag period I and II have positive
ε1 −2.514 0.000 0.243
impacts on the current period FS, but not significant. The reason
ε2 −4.135 0.000 0.201
could be that different types R&D projects need different time to
produce actual economic benefits. This is one of the reasons for
the in-depth research based on the industry.
million CNY and the mean of EI is 0.113, but there are extreme sit- As for FS reversely impact on INI, there is a significant positive
uations in which the managers had no shares or the shareholding correlation between current period FS and INI, and a significant
ratio of executives reached 0.743 above. The correlation analysis negative correlation between the lag period FS I, II and INI,
results are shown in Table 3. The correlation coefficient between respectively. This shows that the decision of INI has a time delay.
the FS and INI is significantly positive at 1% level. In the case of better FS in the current period, the company lacks
motivation for future innovation projects. On the contrary, the
4.2. Endogenous test poor FS in the current period will promote R&D investment.
For the current period, we believe that the FS lags behind the
There could be an endogenous relationship between the INI INI, then the possibility of FS reversely impact on INI is small.
and FS, which leads to endogenous bias in the results of the Therefore, this is only a measurement result and has no practical
Ordinary Least Squares (OLS). Therefore, we first conduct the significance.
endogenous test on the two variables. This paper applies the
Hausman endogeneity test. The results are shown in Table 4. 4.4. Regression analysis of different type energy companies
ε1 and ε2 are the residuals obtained from OLS regression of all
exogenous variables by the INI in Eq. (2). Then we introduce them The 3SLS estimation results for different type energy compa-
into Eq. (3) and conduct regressions. The regression coefficients nies are shown in Table 6. For the technology-intensive energy
are respectively −2.514 and −4.135, and pass the 1% significance companies, FS of the lag period I and II are negatively correlated
level test, indicating that there is an endogenous relationship with INI. This means that the excellent FS in the previous period
between INI and FS. Hence, the simultaneous equations model will lead to a decrease in INI in the current period. The INI of
need be used to estimate the relationship between INI and FS. the lag period I and II have a positive effect on FS. The INI’s
coefficient of lag period I is significant at the level of 1%, but the
current period INI has a significant negative correlation with the
4.3. Regression analysis of full samples current period FS. This means that the economic benefits of INI
in the technology-intensive energy companies have an obvious
To analyze the relationship between INI and FS, we first con- lag effect, which is consistent with the characteristics of this type
ducted a full sample regression analysis. Considering the time of company. It is difficult to develop high technology and the
lag of INI, we added the lag period I and II values of INI and development cycle is long. In addition, the expenses incurred by
FS in equations. In order to compare with the single equation the INI in the current period also have a negative impact on the
model, we also performed OLS regression on the full sample. The FS.
regression results are shown in Table 5. For the capital-intensive energy company, the results are quite
From the relationship between INI and FS, the results of 3SLS different from those of technology-intensive energy companies.
estimation are partially opposite to that of OLS estimation, which The FS of the lag period I are significantly and positively corre-
does not solve the endogenous problem. 3SLS estimation could lated with INI of the current period, indicating that companies
solve the endogenous problem of INI and FS effectively. In terms are more willing to use the earned income to plan INI of the next
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Table 6 INI and low innovation efficiency of the labor-intensive energy

The results of 3SLS regression based on industry. company.
Industry Technology Capital Labor
Equation (2) (3) (2) (3) (2) (3) 4.5. The moderate effect of executive incentives
Variables INI FS INI FS INI FS
1.529*** −.269*** −.341*** In the above section, the endogenous relationship between
FS t
(3.65) (−2.71) (−4.35)
INI and FS has been studied. Under the moderating effect of EXI,
−.503** .162*** .445** executives will increase their willingness to take risks, thereby
FS t −1
(−2.47) (3.81) (1.25)
strengthening INI and improving the FS. Therefore, this paper
−.571*** −.037 −.037 sets the FS as dependent variable to test the moderating effect
FS t −2
(−4.74) (−1.75) (−.37)
of EXI. At the same time, in order to overcome the influence of
−.345** 10.951** .513 endogeneity on EXI, this paper used the INI and EXI during the lag
INI t
(−2.97) (3.21) (.33)
periods as independent variables and introduced them to Eq. (4).
.185*** −8.301** −1.507 The results are shown in Table 7.
INI t −1
(2.68) (−2.87) (−1.44) In the context of the full sample, the INI in the lag periods
INI t −2
.088* −5.141** .387 has a positive impact on FS, the impact in the lag period I is
(1.77) (−2.64) (0.74) significant, which is consistent with the previous test results.
_Cons
−.501 −.041 0.017 −.925* −.535** −.157 After introducing the interaction term between EXI and INI during
(−.29) (−.87) (0.06) (−2.55) (−3.17) (−1.48) the lag periods, it is found that the SI can significantly promote
Controls Yes Yes Yes Yes Yes Yes the increase of FS, and the coefficient of interaction term with INI
R2 .281 .354 .279 .359 .435 .249 is also significantly positive, indicating that the SI can promote
Note: ***, **, *Significant at 1%, 5%, and 10% levels, respectively; () of 3SLS managers to increase INI in the previous period. It has a positive
estimation represents z value. moderating effect on the relationship between INI and FS.
In the context of the company level sample, the technology-
Table 7 intensive energy company further validates the promoting effect
The moderate effect of executive incentive based on industry. of SI. But for the capital-intensive energy company and the labor-
Industry Full sample Technology Capital Labor intensive energy company, although the INI in the lag periods
INI t −1
.089* .078** −.241 −.851* may inhibit the current period FS because of depreciation and
(1.75) (2.39) (−.58) (−2.35) amortization, the SI still plays a facilitating role and can signif-
INI t −2
.069 .164** −.151 .065 icantly moderate the positive impact of INI on FS. While for the
(1.21) (2.55) (−.29) (.18) EI, there is no significant impact of INI on FS regardless of full
.159*** .116* .055* .018 sample or company level sample.
SI t −1
(2.75) (1.87) (.71) (.28)
−.066 .018 −.043 −.079 4.6. Robustness check
EI t −1
(−.88) (.27) (−.17) (−1.49)
1.751* 2.436** 1.852*** 1.857*** To improve the reliability of the results, this paper used the
INI t −1 * SI t −1
(1.77) (2.79) (2.29) (3.59) variable substitution method to test the robustness of results. We
2.271 .839 .827 6.705** use the model of financial sustainable growth proposed by Colley
INI t −1 * EI t −1
(1.88) (.37) (.18) (2.81) et al. (2002) to substitute FS. We apply the 3SLS estimation again
−.097** −.044 −.276** −.172* after introduced them to the simultaneous equations model. the
_Cons
(−1.82) (−.51) (−2.39) (−1.79) results show that there are not significantly difference in variable
Controls Yes Yes Yes Yes coefficients compare to that of previous results, which indicating
Year & Industry Fixed Yes Yes Yes Yes better robustness of the results in this paper.
R2 .377 .449 .458 .427
Adj. R2 .335 .423 .397 .351
5. Conclusions and policy implications
Note: ***, **, *Significant at 1%, 5%, and 10% levels, respectively; () of OLS
estimation represents t value. 5.1. Conclusions

This paper applied the simultaneous equations model to mea-

period when FS in the current period is excellent. INI in the cur- sure the bidirectional endogenous relationship between INI and
rent period INI has a significant positive impact on FS, indicating FS, and used the cluster analysis to classify the energy sector into
that INI can bring about economic returns more quickly. The input the technology-intensive, capital-intensive, and labor-intensive
is directly proportional to the output. That is also in line with energy company. Besides, this paper examined the moderate
the capital characteristic of the capital-intensive energy company. effect of EXI on INI and FS, enriching and deepening the research
However, the INI of the lag period I and II have significantly on fields rated to corporate innovation and FS.
inhibited the FS of the current period, which may be due to The results show the previous period FS has a significant
negative impact on the current period INI. At the same time,
the increase in the proportion of depreciation and amortization
the current period INI has a significant negative impact on the
brought by the previous period INI, thus reducing the company’s
current period FS, while the previous period INI has a positive
revenue.
impact on the current period FS, but the coefficient is not signif-
For the labor-intensive energy company, the FS of lag period icant. In the context of different type energy companies, for the
I have a significant positive correlation with INI at the 5% level, technology-intensive energy company, the previous period FS has
indicating that there is a similarity with the capital-intensive a significant negative impact on the current period INI, indicating
energy company. Only with better FS of previous period, can the that the economic benefits brought by R&D investment have a
energy company invest the profits in future R&D. The INI has no time lag. For the capital-intensive energy company, the results are
significant correlation with FS, which may be related to the low contrary to that of the technology-intensive energy companies.
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X.L. Xu, T. Shen, X. Zhang et al. Energy Reports 6 (2020) 2667–2675

The previous period FS is positively correlated to the current competitive advantage. Executives are the decision-makers of en-
period INI, and the current period INI is significantly positively terprise strategy and they will impact the performance of the en-
correlated to the current period FS. But the previous period INI terprise. Therefore, energy enterprises should cultivate the inno-
has a significant negative impact on the current period FS. For vation consciousness of executives, create an excellent innovation
the labor-intensive energy company, the impact of FS on INI is atmosphere, and integrate human resources and technological
the same as that of the capital-intensive energy company, while innovation resources to improve its core competitiveness.
the promoting effect of INI on FS is not obvious, which may be
related to the lower R&D intensity of this type company. 5.3. Limitation and future research direction
From the perspective of the moderating effect of EXI on the re-
lationship between INI and FS, SI can significantly improve the FS, This paper explored the bidirectional endogenous relationship
and has positively moderating effect of INI on FS. In the context between INI and FS and examined the moderate effect of EXI
of different type company, for the technology-intensive energy on INI and FS. However, some limitations in this paper could be
company, SI can improve the motivation of executives to invest improved in future studies. On the one hand, this paper selected
in innovation, and enhance the company’s future profitability. the energy sector as a research sample; the results cannot be
For the capital-intensive energy company and the labor-intensive sued for other industries. Future studies could take other indus-
energy company, although the previous period INI may negatively tries as a research sample to compare with the energy sector.
affect the current period FS, the increase of EXI is conducive to the On the other hand, this paper adopted the model of financial
smooth operation of energy companies and the improvement of sustainability proposed by Higgins (1981). Future studies could
FS. Therefore, this paper believed that SI has a significant positive employ different methods, such as short-term profitability and
moderating effect on the relationship between INI and FS. In long-term development capacity, to measure financial sustain-
contrast, the EI is not significant in the regression results of the ability to expand the robustness and consistency of the research
full sample, indicating that EI has no significant moderate effect model.
on the relationship between INI and FS.
Funding
5.2. Policy implications
This work was supported by National Natural Science Founda-
According to the conclusions presented above, the following tion of China grant numbers [72003009]; China Postdoctoral Sci-
implications could be developed as follows: ence Foundation [grant numbers 2020M670473]; Youth Project of
First, energy enterprises should improve the equity incentive Humanities and Social Sciences of Ministry of Education in China
mechanism. On the one hand, improving the SI level can stim- [grant numbers 18YJC630213]; National Social Science Founda-
ulate managers’ motivation to serve the company; on the other tion of China [19CGL030]; Natural Science Foundation of Hunan
hand, improving the EI level could reduce the conflict of interest Province [grant number 2019JJ50382]; and Key Project of Hunan
between managers and shareholders to increase the FS of energy Education Department [grant number 19A292].
enterprises through reducing the short-sighted behavior of man-
agers and the cost of principal–agent problems. However, from Declaration of competing interest
the empirical results, due to the imperfect incentive mechanism,
there are still some energy companies that do not pay enough The authors declare that they have no known competing finan-
attention to the role of EXI between INI and FS. For example, the cial interests or personal relationships that could have appeared
EI level is too low to play an effective incentive role, which is to influence the work reported in this paper.
not conducive to the sustainable development of energy compa-
nies. The diversification of the incentive mechanism has become Acknowledgments
the development trend of modern enterprises. Therefore, energy
companies need to pay more attention to the improvement of We sincerely thank the editor and reviewers for their very
EXI structure from SI and EI to fully mobilize the enthusiasm of valuable and professional comments.
managers.
Second, energy enterprises should enhance the awareness of References
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