Can non-mandatory governance mechanism promote corporate green innovation—— Evidence from Internal Audit

Green innovation is a key strategy for enterprises to achieve sustainable development and is essential for countries to achieve high-quality economic growth. Green innovation is influenced by the corporate governance mechanism. Internal audit, as a non-mandatory system, plays a critical role in improving corporate governance, and, as a result, is crucial for enhancing corporate green innovation. This study collects and analyses data on internal auditing practices from Chinese listed companies between 2007 and 2022 to examine how internal auditing influence corporate green innovation. The results show that: (1) Internal auditing significantly enhances green innovation, with findings remaining robust after various robustness and endogeneity tests. (2) Mechanism analysis reveals that internal audits promote corporate green innovation by improving executive awareness of environmental issues, increasing firms' risk tolerance, and reducing financialization, through a process of strategy implementation of “strategic choice and decision—risk assessment—resource allocation”. (3) Heterogeneity analysis shows that internal audits have a stronger impact on green innovation in firms with high internal control quality, non-state-owned enterprises, large-scale firms, and those with greater analyst attention. This study contributes to the theoretical understanding of the role of internal auditing in green innovation and provides insights for Chinese regulators to assess, guide, and improve internal audit practices in promoting sustainability.