Comment on “Beyond Green: Impacts of Green Bond Issuance on Conventional Bonds in China”

Using data from the Chinese bond market, Zhan et al. (2026) provide evidence that the yield spread on straight bonds significantly decreases following a firm's issuance of green bonds. This effect is particularly pronounced for firms headquartered in cities where the local government reports frequently employ environment-related terminology. Zhan et al. further show that green bond issuance increases the likelihood of bond rating upgrades. By carefully constructing a control sample—matching existing straight bonds of green bond issuers with comparable straight bonds of non-issuers—Zhan et al. (2026) offer compelling evidence that green bond issuance helps mitigate firms' environmental regulatory risks. Flammer (2021), a seminal study in green bond research, shows that firms experience positive stock price reactions upon issuing green bonds. Flammer interprets this as evidence that green bond issuance signals a commitment to environmental protection. However, the mechanism by which such commitments enhance firm value is not clearly identified. Zhan et al. (2026) advance the literature by clarifying the specific content of this signal. While both expected cash flows and risk affect stock prices, bond spreads are particularly sensitive to risk, given the fixed-claim nature of debt. Leveraging this feature, Zhan et al. (2026) demonstrate that green bond issuance conveys information about reduced firm risk. Their interpretation is reinforced by the finding that operating cash flows do not significantly change around green bond issuance. I also value this study for providing further evidence consistent with the view that socially responsible behavior lowers risk and reduces the cost of debt (e.g., Goss and Roberts 2011). However, the mechanism through which green bond issuance reduces the risk of straight bonds remains subject to debate. Zhan et al. (2026) argue that green bond issuance mitigates environmental regulatory risk, citing evidence that the effect is stronger for firms headquartered in cities where government reports frequently use environment-related terms. While the frequent use of such terms may indeed reflect heightened attention to environmental issues, it is not necessarily a direct indicator of regulatory risk, as the authors do not control for the presence of regulation-specific language. For example, cities may issue longer reports on environmental matters in response to rising public awareness, irrespective of the actual stringency or enforcement of regulations. In such cases, non-green bond issuers in these cities might face higher business risks from declining sales due to consumer concerns over supply-chain emissions, rather than green bond issuers experiencing a direct reduction in risk. Moreover, the frequency of environment-related words may correlate with other city-level characteristics (e.g., local GDP). For instance, citizens' international exposure to countries with stringent environmental policies could be associated both with lower bond spreads and with more frequent use of environmental terms in city reports. I also have concerns about the generalizability of Zhan et al. (2026) findings. Zhan et al. exclude non–state-owned enterprises (non-SOEs) from their sample, raising the possibility that the results are specific to Chinese SOEs. This exclusion appears to be driven by the fact that only two non-SOEs issued green bonds (Zhan et al. 2026, Table S1), which limits the feasibility of including them in the analysis. However, this fact itself may indicate that political connections are a prerequisite for issuing green bonds in China. An alternative interpretation of their results, therefore, is that green bond issuance signals strong political ties, which in turn reduces the perceived default risk of the firm's bonds. Zhan et al. (2026) find that the impact of green bond issuance on yield spreads is stronger for more liquid bonds. They interpret this result as evidence against the view that green bond issuance narrows spreads by improving liquidity. However, an alternative explanation is that prices of less liquid assets incorporate new information more slowly, which could attenuate the observed effect. To strengthen their argument, I would like to see whether liquidity measures improve following green bond issuance. Zhan et al.'s (2026) Table 6 reports no significant increase in cash flow following green bond issuance. However, I am concerned that this insignificant treatment effect may stem from the inclusion of profitability (ROA) as a control variable. Because ROA is highly correlated with operating performance, any change in operating cash flow after green bond issuance may be absorbed by the ROA control. Moreover, given the long-term nature of environmental investments, it is plausible that the impact of green bond issuance on cash flow would materialize only with a lag. Although I have several concerns, I acknowledge that Zhan et al. (2026) make an important contribution to the growing literature on green bonds. Their study introduces an innovative approach by examining the impact of green bond issuance on the same firms' existing straight bonds. The empirical analyses are carefully executed and provide persuasive evidence that green bond issuance reduces firm risk.