Carbon emissions and overinvestment are green bonds the solution?

Abstract This study examines the effect of carbon emissions on overinvestment and investigates whether this relationship is moderated by green bond issuance. Based on a sample of 90 non‐financial American firms (45 green bond issuers and 45 matched firms) observed from 2014 to 2022, the results indicate that carbon emissions, particularly those from Scopes 1 and 2, increase overinvestment. These findings suggest that carbon emissions are associated with agency conflicts, attributable to various factors such as divergent investment horizons between managers and shareholders. Furthermore, our results show that the issuance of green bonds attenuates this impact. This finding implies that green bonds emerge as a strategic tool not only to address external challenges, such as environmental issues—particularly the increase in carbon emissions—but also to manage internal challenges, such as the problem of overinvestment. Our study contributes to the growing literature on sustainable finance and corporate governance by highlighting the dual role of green bonds in both environmental management and investment efficiency.