Investors face reduced incentives to finance technological change that devalues their legacy investments. We formalize this “asset overhang” and apply our framework to the climate-banking nexus. Leveraging (1) firm-level data on green innovation and diffusion and (2) the sets of product and technology market peers, we implement a shift-share design that identifies banks’ credit facilities impacted by green firm activities. We find that green firms imposing an asset overhang across all lenders are 3 to 7 percentage points more likely to report tight credit supply conditions. The presence of legacy-free investors mitigates the asset overhang problem, thereby facilitating technological change.

Theory offers conflicting predictions on how bank specialization affects corporate innovation. We show that the sign and magnitude of this effect vary with the degree of “asset overhang” across sectors—the risk that new technologies reduce the value of banks’ legacy loan portfolios. Using Belgian innovation survey data and US patent data, we find that lenders’ sectoral specialization enhances innovation for firms operating in sectors with low asset overhang, but hinders innovation in sectors with high asset overhang. These findings are robust to different measures of asset overhang and an identification strategy using bank mergers. We further show that these heterogeneous effects arise through financial contracting. Our findings highlight how product market characteristics shape the role of bank specialization in innovation.