00:58 03/01/2024 Does green bond issuance affect stock price crash risk?

Evidence from China - ScienceDirect

Finance Research Letters

Available online 20 December 2023, 104908
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Does green bond issuance affect stock price crash

risk? Evidence from China
Yuyao Zhang 1 , Yinuo Li 2 , Xingyu Chen 3

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Abstract

This paper investigates the impact of green bond issuance on stock price crash risk and the mediating roles
of information asymmetry and financing constraints by utilizing data of Chinese listed firms from 2014 to
2021. It is empirically tested that green bond issuance can significantly reduce stock price crash risk based
on difference-in-differences (DID) methods. Our mechanism analysis shows that green bond issuance
decreases stock price crash risk by addressing information asymmetry and alleviating financing constraints.
Moreover, the reduction effect is more pronounced among firms in polluting industries and firms with non-
SOEs ownership types. This paper provides a new perspective on stock market risk prevention.

Introduction

Recently, environmental sustainability has emerged as a paramount concern in the global financial
landscape (Friedman and Heinle, 2016; Hossain et al., 2023). The escalating awareness of climate change
and its diverse consequences has driven increased demand for sustainable financial instruments (Zhang et
al., 2023a), with green bonds emerging as a pivotal component of this transformative movement (Wang et
al., 2022a). Specifically designated for financing environmentally responsible projects and initiatives, green
bonds have gained substantial traction to align capital markets with sustainable development goals (Bhutta
et al., 2022). Despite extensive exploration of the economic benefits of green bonds (Fatica and Panzica,
2021; Reboredo and Ugolini, 2020), their potential impact on stock price crash risk remains relatively
underexplored territory.

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00:58 03/01/2024 Does green bond issuance affect stock price crash risk? Evidence from China - ScienceDirect

Many companies have issued green bonds to promote sustainable development. Existing literature finds
that green bond issuance can improve firms' environmental performance (Zheng et al., 2023), increase stock
returns (Tang and Zhang, 2020), and boost investor trust and information transparency (Hyun et al., 2022;
Wang and Jiang, 2023). While the environmental and financial performance effect of green bond issuance
has been widely explored (i.e., Flammer, 2021; Fan et al, 2023; Lee et al., 2023; Zhang et al., 2021), the
precise effect of green bond issuance on stock price crash risk is not sufficiently understood.

Stock price crash risk refers to the probability of an extreme decline in stock price (Habib et al., 2018).
Regarding the driver of these crashes, information asymmetry and financing constraints are identified as
the primary factors (Hutton et al., 2009; He and Ren, 2023). Green bonds offer detailed information
regarding the use of proceeds, enabling investors to assess environmental initiatives and mitigate
information asymmetry (Wang et al., 2023). In addition, the issuance of green bonds enables companies to
access additional financing resources, thereby alleviating financing constraints. (Wang et al., 2022b).
Therefore, investigating the effect of green bond issuance on stock price crash risk is crucial to
understanding micro-companies behaviours and financial market risk prevention.

In this paper, we provide evidence of the effect of green bond issuance on stock price crash risk based on
Chinese listed companies from 2014 to 2021, with data accessed via the China Stock Market & Accounting
Research (CSMAR) database. Referring to Kim et al. (2011), the outcome variable is measured by two
variables: skewness of daily stock returns (Ncskew) and down-to-up volatility (Duvol). The empirical results
show that green bond issuance can decrease stock price crash risk, and the effect is more pronounced
among firms in polluting industries and firms under non-SOEs ownership type. Meanwhile, the results still
hold after conducting a series of robustness checks, including parallel trend tests, changing the time
window, PSM-DID tests, alternative measures, and other robustness checks.

This paper has two strands of contributions. First, we extend the studies on the consequences of green bond
issuance. Large existing literature has documented a positive effect of green bond issuance on firms’
environmental activities (Flammer, 2021; Fatica and Panzica, 2021). By investigating the relationship
between green bond issuance and stock price crash risk, this paper enriches the consequences of green
bond issuance. Second, this paper contributes to the academic literature on the determinants of stock price
crash risk. The results of this paper offer valuable insights for policymakers and regulatory authorities
regarding stock market risk prevention.

Section snippets

Sample and data sources

This research uses the enterprises listed in Shanghai and Shenzhen exchanges as our sample. The research
period is set between 2014 and 2021. The data are collected from the China Stock Market and Accounting
Research Database (CSMAR), which is generally recognized as a valid and reliable source. Data are
considered in the following process: First, we exclude data from our sample for firms that receive Special
Treatment (S.T.). Second, we exclude year-firm observations with missing values.…

Baseline regression
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00:58 03/01/2024 Does green bond issuance affect stock price crash risk? Evidence from China - ScienceDirect

Following Model (5), Table 1 presents our baseline regression results. First, column (1) displays the
regression results of Treati · Postt using the dependent variable Ncskew without control variables, while
column (2) presents the results with control variables. The results show that the coefficients of Treati · Postt
are -0.777 and -0.807 (significance at the 1% level), suggesting that green bond issuance can significantly
reduce firms' stock price crash risk. Second, as for Duvol, the…

Industry heterogeneity

Green companies, particularly those committed to environmental activities, often prioritize transparency
and environmental, social, and governance (ESG) information disclosure (Van et al., 2023; Zhang, 2023a;
Zhang et al., 2023b). They may be more inclined to provide detailed information about their sustainability
initiatives. In contrast, polluting companies are generally documented as more information asymmetric
(Martínez‐Ferrero et al., 2016). Therefore, all listed firms are grouped into…

Addressing information asymmetry

In the issuance of green bonds, companies are requested to provide detailed disclosures about their
environmental efforts and sustainability practices to prevent "greenwashing" (Zhang, 2023b), which can
enhance firms' information transparency. Consequently, investors gain better insights into the company's
operations, risks, and prospects. Addressed information asymmetry can attract more informed and
confident investors, promoting stock price stability and reducing stock price crash risk (He…

Conclusions

This study uses information from Chinese listed companies to assess the impact of green bond issuance on
stock price crash risk. The main findings are as follows. First, the empirical analysis reveals a substantial
reduction in stock price crash risk after the issuance of green bonds, and these results remain robust after
conducting a series of robustness tests, including parallel trend test, placebo test, PSM-DID test, changing
the time window, alternative measures, and other robustness tests. …

CRediT authorship contribution statement

Yuyao Zhang: Conceptualization, Methodology, Writing – review & editing. Yinuo Li: Conceptualization,
Methodology, Writing – review & editing. Xingyu Chen: Conceptualization, Methodology, Software, Writing
– original draft.…

Declaration of Competing Interest

The authors report there are no competing interests to declare.…

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