**1. Introduction**

Nowadays, the energy system in the world is mainly based on fossil fuels, nuclear energy and hydropower [1,2]. This system has been highly resilient against external shocks over the past few decades, but is facing a variety of challenges at present. In the wake of the 1970s oil crisis and owing to ascending carbon dioxide concentrations in the atmosphere, concerns about the security of supply and the sustainability of the concurrent regime are rising. In addition, after relentless nuclear accidents in Chernobyl in 1986 and Fukushima in 2011, several countries decided to opt out of nuclear power [3]. All of these cases expedite the on-going transformation of the energy system and the strengthening development of renewable energy technologies [4]. One of the driving forces behind this transformation is innovation [5]. Faced with complex environments and the changing market demand, the energy industry should strive to increase investment in innovations [6,7] and explore an e ffective executive incentive system to enhance its core competitiveness and promote corporate sustainable development [8].

As modern enterprises, most energy companies, however, have a principal-agent problem of ownership-management separation. Shareholders tend to pursue high returns of technological innovation, and realize the long-term development of companies through innovations, and finally achieve the goal of maximizing corporate value [9]. In contrast, managers are more inclined to focus on activities related to short-term interests such as their own salaries and benefits. Therefore, managers are likely to avoid technological innovations in pursuit of short-term benefits due to the characteristics of technological innovation such as uncertainty, high risk, and a long profit cycle [10]. This results in insu fficient investment in corporate R&D projects, which is unfavorable to the sustainable growth of energy companies [11]. Therefore, how managers balance the relationship between the short-term profits and the sustainable development becomes a main factor a ffecting the decision-making of R&D investment.

The existing literature suggests that R&D investment can promote corporate financially sustainable performance [12–14]. However, few studies focus on whether corporate R&D intensity can be maintained, or whether current corporate performance can trigger managers' short-sighted behaviors such as reducing R&D expenditure. According to the principal-agent theory, managers may prefer to have behaviors that are beneficial to their positions and interests but not for the maximization of corporate value in an information asymmetrical environment [10]. Financially sustainable performance appraisal is one of key indicators determining the managers' retention [13,15]. Therefore, the managers usually try to increase corporate profits while cutting costs to achieve current target performance [16]. This phenomenon will undoubtedly induce managers to deliberately reduce the current cash expenditures in R&D investment and other activities with high uncertainties in order to achieve target financial performance, thus jeopardizing the long-term development objectives of the company. Therefore, it is necessary to study the impact of R&D investment on financially sustainable performance and the interactive endogenous relationship between R&D investment and financially sustainable performance.

Managers play a leading role in innovation activities of energy companies. The e ffective executive incentive mechanism is a critical factor ensuring corporate R&D investment [17]. Since managers' return is mainly derived from the short-term salary income and the salary income depends on the short-term financial performance of the energy companies, managers are often not in favor of R&D projects due to the high risks and uncertainty [18]. Therefore, it is an important choice for shareholders to implement the executive incentive to improve the risk-taking ability and enhance the core competitiveness of energy companies. In recent years, a lot of studies have focused on the impact of equity incentives and salary incentives of executives on R&D investment and financially sustainable performance [19–21], but no consistent conclusions have been drawn. In addition, there is little literature on the interactive endogenous relationship between R&D investment and financially sustainable performance. Some questions need to be asked. Will other production factors impact on the economic returns from point of the view of R&D investment in the energy sector? How is financially sustainable performance reversely reflected by the period and intensity of R&D investment? Are the moderate e ffects of di fferent types of executive incentive on the relationship between R&D investment and financially sustainable performance consistent? Therefore, all these issues need to be further discussed to expand the research field of innovation performance and beneficial to optimize and update the energy industry structure.

The contribution of this paper is as follows. First, this paper studies the interactive endogenous relationship between R&D investment and financially sustainable performance and focuses on the reverse e ffect of financially sustainable performance on R&D investment. This will fill the gap of research on the e ffect of financially sustainable performance on R&D investment in the existing literature. Secondly, we explore the moderate e ffect of di fferent types of executive incentive on the relationship between R&D investment and financially sustainable performance. Finally, the three-stage least square method (3SLS) of the simultaneous equation method (SEM) is employed in this paper. This can not only control the endogeneity of variables but also exclude the subjectivity of the choice of instrumental variables to make the empirical results more realistic and robust. The second part presents a literature review and the hypotheses, and the third part contains the methodology. The fourth part is the empirical results, and the final part is the conclusions and suggestions.

#### **2. Literature Review and Hypotheses**

#### *2.1. Relationship between R&D Investment and Financially Sustainable Performance*

The direct target of innovation investment is to obtain profits, and enterprises introduce new production technology to improve financially performance and achieve excess returns. Most studies have shown that innovation investment has a significant positive effect on corporate performance. Stam and Wennberg [22] found that innovation investment improves the performance of start-up high-tech enterprises. Yunis et al. [23] found that there is a significant positive correlation between innovation investment and enterprise performance. However, some scholars argued that there is a non-significant positive relationship between innovation investment and corporate performance. Rosenbusch et al. [24] investigated the relationship between innovation investment and corporate performance in high-tech enterprises and found that there is a weak negative correlation between them. Hsu et al. [25] found that there is an inverted U-shaped relationship between innovation intensity and enterprise performance under the control of technical indicators. Naranjo-Valencia et al. [26] found that although there is a significant positive correlation between innovation investment and corporate performance, there is no significant relationship between the number of innovation personnel and corporate performance.

In terms of the lag effect of innovation investment, Ciftci and Cready [27] found that innovation investment is positively correlated with the company's future profit, and significantly positively correlated with the change in stock price lagging by one year, but not with the change in stock price in the current period. Falk [28] found that there is a significant positive correlation between innovation investment intensity and sales growth rate of lagging two periods, but this positive effect gradually decreases with time. Zabala et al. [29] explored the impact of innovation investment on financially sustainable performance from the perspective of property right heterogeneity. The results show that innovation investment has a positive impact on current period financial performance, and the positive correlation between innovation investment and lag financial performance gradually decreases.

Most of the existing literature measures financial performance directly by the indicators such as return on total assets and return on net assets, lacking distinction between short-term performance and long-term performance. The R&D period of the energy industry is long [30], and the corporate profitability indicator is hard to reveal the effect of technological innovation in the short term. In the meantime, because the short-term financial performance is related to the performance assessment of the management, the managemen<sup>t</sup> will choose less innovation investment to pursue corporate profits for their own interests driven by the psychology of risk aversion. Therefore, the short-term performance of innovation investment is difficult to improve rapidly, while the improvement in long-term performance and value of technological innovation could be more significant.

#### *2.2. The Impact of Executive Incentive on R&D Investment and Financially Sustainable Performance*

According to the principal-agent theory, managers will not only pursue the goal of monetary income, but also obtain some non-monetary income. In a relatively perfect market environment, investors can establish a portfolio to avoid risks, while executives cannot disperse their human capital to obtain portfolio income, and only use operation performance in exchange for short-term returns such as compensation and benefits. Therefore, the management, especially the risk-averse management, will focuses on the projects that can improve the short-term performance, avoid the innovative R&D projects with high uncertainty, and adopts the appropriate incentive and constraint mechanism. For the executives, the key is to increase their innovation investment and improve the sustainable performance.

In terms of salary incentive, most scholars believed that salary incentive is positively related to financial performance, and it will strengthen the role of innovation investment in promoting sustainable performance. Coles et al. [31] found that salary incentive could e ffectively solve the principal-agent problem and enhance the motivation of managemen<sup>t</sup> to engage in venture capital projects. Jacobsen and Andersen [32] found that salary incentives improve corporate performance significantly and positively moderate the relationship between innovation investment and corporate performance. However, some studies demonstrated that there is no significant positive correlation between salary incentive and corporate performance. Lui et al. [33] found that innovation investment has a significant positive e ffect on financial performance, and the positive moderate e ffect of equity incentive is excellent, but the moderate e ffect of salary incentive is poor. Lu et al. [34] found that there is an inverted U-shaped relationship between salary incentive and innovation investment.

In terms of equity incentive, Fong [35] believed that executive ownership can significantly increase the investment in innovation projects to improve the enterprise innovation level. The "interest alignment hypothesis" proposed by Jensen and Meckling [36] holds that with the increase in the proportion of executives' shareholding, the consistency of their own interests and corporate interests will also be improved. Therefore, equity incentives are conducive to reducing the first type of agency problem between shareholders and managers and urging executives to increase innovation investment to improve financial performance. Xu et al. [37] found that equity incentives can significantly moderate the positive correlation between innovation investment and financially sustainable performance. However, some scholars believed that the relationship between innovation investment and corporate performance is non-linear or even negative under the moderator of equity incentive. Alessandri and Pattit [38] found that salary incentives have a moderate negative e ffect on the relationship between innovation investment and financially sustainable performance, while equity incentives have a moderate positive e ffect. Zattoni and Minichilli [39] found that equity incentives do not improve financially sustainable performance. They argued that improving the corporate governance mechanism is an essential way to promote development of the equity incentive system. Polder and Veldhuizen [40] found that equity incentives are positively related to financial performance, but have an inverted U-shaped relationship with innovation investment.

The existing research has not formed a unified conclusion on the moderate mechanism of executive incentives between innovation investment and financially sustainable performance. The reasons could be as follows: first, the research objects are quite di fferent, as some scholars select the whole industry enterprises as samples, while other studies take state-owned enterprises, private enterprises, high-tech enterprises as samples. Second, the application of executive incentive mechanisms in China is short, which may have a deviation on the impact of innovation investment and financial performance. Finally, there are gaps in the R&D cycle and innovation risks in di fferent industries, and the moderate e ffects of executive incentives are also di fferent. Therefore, the research on the e ffect of executive incentive and innovation investment in the energy industry needs further analysis.
