Green Bonds Impact on Firm Performance: The Mediating Role of Financial Risk and Financial Quality

ABSTRACT Green bonds have emerged as a significant financial instrument with dual benefits, positively impacting corporate performance and environmental sustainability. They focus on stakeholder theory instead of shareholder interest. This study examines the effect of green bond issuance on firm performance, focusing on the mediating roles of firm financial risk and financial quality. Using panel data from 2012 to 2022, the study employs the Propensity Score Matching‐Difference in Differences (PSM‐DID) method to analyze the relationship between green bonds and firm performance. The findings indicate that green bonds enhance both financial and environmental performance. Firms issuing green bonds experience improved firm value (Tobin's Q ) and profitability (ROA), with the effects becoming more pronounced in the second year post‐issuance. Additionally, green bond issuance lowers financial risk, as reflected in reduced debt‐to‐equity ratios, and enhances financial quality, indicated by higher Altman Z ‐scores. Green bonds also reduce the cost of capital (WACC), attracting investors seeking sustainable investments, which typically have lower yields than conventional bonds. On the environmental front, firms that issue green bonds show significant improvements in ESG scores and achieve lower carbon emissions than those that do not issue such bonds. However, while green bond issuance initially leads to a notable reduction in carbon emissions, this effect slightly diminishes in the second year, highlighting the need for sustained sustainability initiatives.