“Bond. Green bond.” Yet when does green bond issuance truly benefit expected firm performance?

Given an increasing focus on sustainability factors, many companies have started to issue green bonds. In this study, we investigate the overall effects green bonds can have on expected firm performance for the issuing firm, depending on contingency factors. Grounded in signaling theory, our results suggest that increasing firm sustainability performance positively affects the impact that green bond issuance has on expected firm performance, proxied by cumulative abnormal returns (CARs). However, according to the attention-based view, this positive effect applies only up to a certain threshold, after which investors might perceive green bond issuance by firms with high sustainability performance (gauged through ESG scores) as being excessive attention to sustainable activities that can distract a firm from its financial goals, leading to a decreased effect on performance. Moreover, we show that this inverted U-shaped relationship is moderated by company profitability levels (i.e., ROE) and by use or non-use of proceeds from green bonds for green technological innovations, both of which contribute to a firm's overall legitimacy in green bond issuance. These aspects should be considered carefully by managers when issuing green bonds. Regarding the current academic and managerial debate surrounding sustainable investments, our findings contribute to an understanding of exactly when green bonds may be beneficial for firms, which is also of interest to policymakers.