Green Bond Issuance by Firms, External Monitoring, and Probability of Default: An Empirical Research Based on Green Policies

Abstract

Utilizing a staggered Difference-in-Differences (DID) approach, we investigate the impact of green bond issuance on the probability of default among Chinese firms from 2016 to 2022. We find that issuing a green bond significantly reduces the firm’s default probability, highlighting the joint advantage of financial stability and environmental sustainability. The effect is particularly strong for firms that lack strong external monitoring by financial analysts and media, for high-polluting firms, and for firms facing a high level of competition. Our results also suggest that the transmission from green bond issuance to improved financial resiliency works both through alleviating financial constraints and through increasing stock liquidity.

Keywords: green bond issuance, default probability, analyst and media coverage, financial constraints, stock liquidity

JEL Classification: G14, G32, G33