Does It Pay to Issue Green? An Institutional Comparison of Mainland China and Hong Kong’s Stock Markets Toward Green Bonds

Abstract

The stock market is an indicator of investor sentiment when it comes to new information or innovative firm-level products. Green bonds are both innovative and unique in terms of their higher information disclosures and understanding the impact of sustainable finance on investor outlook for a company’s stock. Using the comparative case of Mainland China and Hong Kong’s stock market, we examine whether green bond announcements from 2016 to 2019 can create significant investor reactions. By employing the event study methodology, we confirm that both markets react in a positive way toward green bond announcements. This reinforces the reputational and financial benefits of green bonds. We find that issuers that are non-banks, environmentally friendly firms as well as those issuing non-general bonds, create a more positive reaction, whereas ownership aspects do not matter as much for investors. However, even among those issuers listed in both markets, certain institutional dynamics like strategic framing and source credibility tend to reinforce a firm’s institutional legitimacy and are seen as being more prominent for investor reaction. The policy implications of our study show that the stock market reaction among two connected economies, where previously varying institutional contexts have resulted in regional differences, are now equally supportive of sustainable financial markets like the green bond. As seen with the positive stock market sentiment, governments and listed issuers can now better align their policies and internal strategies, allowing the low-carbon transition to be a financially attractive opportunity for all investors.

Analyzing Trends in Green Financial Instrument Issuance for Climate Finance in Capital Markets

“…Further, research on the relationship between climate change, economic aspects, and risk management was notable (Stern 2022;Wright et al 2015;Rocha et al 2022;Tripathy 2017). 'Sustainable development', 'financial markets', 'green investment', 'green innovation', 'corporate social responsibility', 'environmental regulation', and 'China' words were also striking (Purkayastha and Sarkar 2021;Dong et al 2022;Chen et al 2022;Chi et al 2023;Huang and Lei 2021). The interdependence of green bonds and other financial markets, including the stock market, carbon, and conventional financial markets, has garnered attention, majorly in China (Ren et al 2022;Jiang et al 2022a;Su et al 2022;Naeem et al 2021;Elsayed et al 2022;Verma and Bansal 2023;Xi and Jing 2022;Mensi et al 2022).…”

The impact of investor attention on green bond returns: How do market uncertainties and investment performances of clean energy and oil and gas markets affect the connectedness between investor attention and green bond?

“…Gao, Li, and Wang (2023) investigate the influence of investor attention on green security markets, including green bonds and green stocks in China, and show that green stocks and investor attention are more interdependent than green bonds. Chen, Weber, and Saravade (2022) investigate the general investor reaction to green bond announcements in the stock markets of Mainland China and Hong Kong and discover that both stock markets react positively to green bond announcements, indicating that investor reaction is favorable.…”

Incorporating Green Bonds into Portfolio Investments: Recent Trends and Further Research

“…On the other hand, research has shown that green bonds can positively affect corporate financial performance and stock prices [22]. Companies that issue them may experience an increase in the price of their stocks following the issuance announcement, indicating that investors perceive green bonds as a positive signal of the company's commitment to sustainability [23].…”