How green bonds exert a demonstration effect on firms within the same region

Abstract

This study investigates the regional demonstration effect of green bond (GB) issuance on conventional bond markets in China. Despite the growing importance of GBs in sustainable finance, their limited market penetration raises questions about their broader impact. This research addresses the gap in understanding how GBs influence neighboring firms' green practices and conventional bond credit spreads (CSs), crucial for enhancing China's green financial system. Utilizing a multi-phase difference-in-differences framework, we analyze data from Chinese listed companies (2010–2022), this study examines the regional demonstration effect of green bond (GB) issuance on conventional bond markets in China. Employing a multi-phase difference-in-differences framework, the analysis reveals that the issuance of GBs by firms significantly reduces the credit spreads (CSs) of conventional bonds issued by other enterprises within the same region. This reduction is driven by strategic and substantive green imitation behaviors, where neighboring firms enhance their green practices to achieve financial benefits. The study identifies heterogeneity in the demonstration effect: firms in non-heavy-polluting industries, provincial capital cities, and non-state-owned enterprises exhibit stronger green imitation capacities, while those in highly competitive industries, financially distressed conditions, and non-western regions demonstrate greater willingness to engage in green imitation. In addition, this paper categorizes green imitation into benchmarking-driven imitation based on the information cascade theory and competition-driven imitation based on the homogeneous strategy theory according to different motivations for imitation, with the latter having a greater impact on green imitation. The findings highlight GBs’ positive externalities, demonstrating their role in incentivizing regional green transitions and reducing financing costs for conventional bonds. Policymakers should leverage GBs’ demonstration effect through targeted incentives, enhanced environmental disclosure mandates, and inter-firm collaboration. This study advances green finance literature by linking GBs to conventional bond markets and elucidating imitation mechanisms, offering actionable insights for sustainable economic transformation.