The capital market effects of local government green special Bonds: An examination from the perspective of corporate stock liquidity

From a green governance perspective, this paper examines the impact of local government green special bonds on corporate stock liquidity. Using data of listed firms in China from 2015-2022, we use a multi-time point difference-in-differences model to empirically verify that local governments issuing green special bonds can help promote local firms’ stock liquidity from both “capital flow” and “signal flow”. Regarding the influence mechanism, we find that green special bonds issuance enhance firms’ stock liquidity by existence of green investors, ESG investment funds’ shareholding, and firms’ financing constraints. Further analysis indicates that the impact of green special bonds on stock liquidity vary across regions, industries, and firm-level characteristics. This paper contributes to understanding the interaction mechanism between local governments and the capital market in China in the area of green development, significantly whether the investment behavior in capital market can contribute to environmental governance.