IDEAS home Printed from https://ideas.repec.org/a/eee/riibaf/v77y2025ipas0275531925001771.html

Environmental regulations and bond pricing: A quasi-natural experiment based on the new environmental protection law

Author

Listed:
  • Wang, Qian
  • Wang, Li
  • Zhang, Yuan
  • Peng, Hongfeng

Abstract

We extend the existing body of research in law and finance by exploring it through the lens of environmental protection legislation. Using the implementation of the new Environmental Protection Law as a quasi-natural experiment, we find that the credit spread of bonds issued by heavily polluting enterprises in both the primary and secondary bond markets can be significantly enhanced by the implementation of the new Environmental Protection Law. After decomposing bond credit spreads into liquidity spreads and default spreads, we further find that the implementation of the new Environmental Protection Law significantly increases bond default spreads, with no significant impact on liquidity spreads. And the increased impact of the new Environmental Protection Law on bond credit spreads is primarily driven by penalty effects, investor sentiment effects, and resource effects. Additionally, the effect on bond credit spreads diminishes as customer concentration decreases, social awareness increases, and companies engage in green innovation. It is also more significant for mature enterprises and long-term bonds. This paper has a certain reference significance for evaluating the economic effects of the new Environmental Protection Law, guiding further targeted policy efforts, and achieving economic green transformation.

Suggested Citation

  • Wang, Qian & Wang, Li & Zhang, Yuan & Peng, Hongfeng, 2025. "Environmental regulations and bond pricing: A quasi-natural experiment based on the new environmental protection law," Research in International Business and Finance, Elsevier, vol. 77(PA).
    • Handle: RePEc:eee:riibaf:v:77:y:2025:i:pa:s0275531925001771
    DOI: 10.1016/j.ribaf.2025.102921
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0275531925001771
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ribaf.2025.102921?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Valeri V. Nikolaev, 2010. "Debt Covenants and Accounting Conservatism," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 48(1), pages 137-176, March.
    2. Vikrant Vig, 2013. "Access to Collateral and Corporate Debt Structure: Evidence from a Natural Experiment," Journal of Finance, American Finance Association, vol. 68(3), pages 881-928, June.
    3. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    4. Martynova, Marina & Renneboog, Luc, 2011. "Evidence on the international evolution and convergence of corporate governance regulations," Journal of Corporate Finance, Elsevier, vol. 17(5), pages 1531-1557.
    5. Valeri V. Nikolaev, 2010. "Debt Covenants and Accounting Conservatism," Journal of Accounting Research, Wiley Blackwell, vol. 48(1), pages 51-89, March.
    6. Vasileiou, Efi & Georgantzis, Nikolaos & Attanasi, Giuseppe & Llerena, Patrick, 2022. "Green innovation and financial performance: A study on Italian firms," Research Policy, Elsevier, vol. 51(6).
    7. Zhe Deng & Dongya Li & Tao Pang & Maosheng Duan, 2018. "Effectiveness of pilot carbon emissions trading systems in China," Climate Policy, Taylor & Francis Journals, vol. 18(8), pages 992-1011, September.
    8. Brian J. Bushee & John E. Core & Wayne Guay & Sophia J.W. Hamm, 2010. "The Role of the Business Press as an Information Intermediary," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 48(1), pages 1-19, March.
    9. Hong Zhou & Guoping Li & Wanfa Lin, 2016. "Corporate Social Responsibility and Credit Spreads: An Empirical Study in Chinese Context," Annals of Economics and Finance, Society for AEF, vol. 17(1), pages 79-103, May.
    10. Xin Li & Fei Guo & Qiong Xu & Siwei Wang & Hongyun Huang, 2023. "Strategic or substantive innovation? The effect of government environmental punishment on enterprise green technology innovation," Sustainable Development, John Wiley & Sons, Ltd., vol. 31(5), pages 3365-3386, October.
    11. Jeremy Bertomeu & Igor Vaysman & Wenjie Xue, 2021. "Voluntary versus mandatory disclosure," Review of Accounting Studies, Springer, vol. 26(2), pages 658-692, June.
    12. Anderson, Ronald C. & Mansi, Sattar A. & Reeb, David M., 2004. "Board characteristics, accounting report integrity, and the cost of debt," Journal of Accounting and Economics, Elsevier, vol. 37(3), pages 315-342, September.
    13. Simeon Djankov & Oliver Hart & Caralee McLiesh & Andrei Shleifer, 2008. "Debt Enforcement around the World," Journal of Political Economy, University of Chicago Press, vol. 116(6), pages 1105-1149, December.
    14. Kennedy, Mike & Palerm, Angel, 2014. "Emerging market bond spreads: The role of global and domestic factors from 2002 to 2011," Journal of International Money and Finance, Elsevier, vol. 43(C), pages 70-87.
    15. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    16. Xinyue Hao & Fanglin Chen & Zhongfei Chen, 2022. "Does green innovation increase enterprise value?," Business Strategy and the Environment, Wiley Blackwell, vol. 31(3), pages 1232-1247, March.
    17. Grundy, Bruce D. & Li, Hui, 2010. "Investor sentiment, executive compensation, and corporate investment," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2439-2449, October.
    18. Bolton, Patrick & Kacperczyk, Marcin, 2021. "Do investors care about carbon risk?," Journal of Financial Economics, Elsevier, vol. 142(2), pages 517-549.
    19. Lily Fang & Joel Peress, 2009. "Media Coverage and the Cross‐section of Stock Returns," Journal of Finance, American Finance Association, vol. 64(5), pages 2023-2052, October.
    20. Wang, Lina & Cao, Li, 2024. "Analyst attention and corporate green innovation," Finance Research Letters, Elsevier, vol. 60(C).
    21. Kanamura, Takashi, 2020. "Are green bonds environmentally friendly and good performing assets?," Energy Economics, Elsevier, vol. 88(C).
    22. Simon Gilchrist & Egon Zakrajsek, 2012. "Credit Spreads and Business Cycle Fluctuations," American Economic Review, American Economic Association, vol. 102(4), pages 1692-1720, June.
    23. Huy Nguyen Anh Pham & Vikash Ramiah & Imad Moosa, 2020. "The effects of environmental regulation on the stock market: the French experience," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3279-3304, December.
    24. Elsa Allman, 2022. "Pricing climate change risk in corporate bonds," Journal of Asset Management, Palgrave Macmillan, vol. 23(7), pages 596-618, December.
    25. Jianbo Song & Haiqing Zhang & Zihao Su, 2021. "Environmental subsidies and companies’ environmental investments," Economic and Political Studies, Taylor & Francis Journals, vol. 9(4), pages 477-496, October.
    26. Huynh, Thanh D. & Xia, Ying, 2021. "Climate Change News Risk and Corporate Bond Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(6), pages 1985-2009, September.
    27. Lee, Chi-Chuan & Song, Hepeng & An, Jiafu, 2024. "The impact of green finance on energy transition: Does climate risk matter?," Energy Economics, Elsevier, vol. 129(C).
    28. Guo, Mengmeng & Wang, Huixin & Kuai, Yicheng, 2023. "Environmental regulation and green innovation: Evidence from heavily polluting firms in China," Finance Research Letters, Elsevier, vol. 53(C).
    29. Jianhua Tan & Kam C. Chan & Yining Chen, 2022. "The impact of air pollution on the cost of debt financing: Evidence from the bond market," Business Strategy and the Environment, Wiley Blackwell, vol. 31(1), pages 464-482, January.
    30. Flammer, Caroline, 2021. "Corporate green bonds," Journal of Financial Economics, Elsevier, vol. 142(2), pages 499-516.
    31. Guo, Jiaqi & Li, Changhong & Jiao, Wenting, 2024. "Corporate Social Responsibility disclosure and market value: The mediating role of investor attention," Finance Research Letters, Elsevier, vol. 67(PA).
    32. Nozawa, Yoshio & Qiu, Yancheng, 2021. "Corporate bond market reactions to quantitative easing during the COVID-19 pandemic," Journal of Banking & Finance, Elsevier, vol. 133(C).
    33. Jing-Zhi Huang & Bibo Liu & Zhan Shi, 2023. "Determinants of Short-Term Corporate Yield Spreads: Evidence from the Commercial Paper Market," Review of Finance, European Finance Association, vol. 27(2), pages 539-579.
    34. Zhou, Bo & Ding, Hao, 2023. "How public attention drives corporate environmental protection: Effects and channels," Technological Forecasting and Social Change, Elsevier, vol. 191(C).
    35. Lee H. Seltzer & Laura Starks & Qifei Zhu, 2022. "Climate Regulatory Risk and Corporate Bonds," NBER Working Papers 29994, National Bureau of Economic Research, Inc.
    36. Yao, Shouyu & Pan, Yuying & Sensoy, Ahmet & Uddin, Gazi Salah & Cheng, Feiyang, 2021. "Green credit policy and firm performance: What we learn from China," Energy Economics, Elsevier, vol. 101(C).
    37. Sudheer Chava, 2014. "Environmental Externalities and Cost of Capital," Management Science, INFORMS, vol. 60(9), pages 2223-2247, September.
    38. Gu, Jing & Shi, Xinyu & Wang, Peini & Xu, Xun, 2022. "Examining the impact of upstream and downstream relationship stability and concentration on firms’ financial performance," Journal of Business Research, Elsevier, vol. 141(C), pages 229-242.
    39. Pan, Yue & Shroff, Nemit & Zhang, Pengdong, 2023. "The dark side of audit market competition," Journal of Accounting and Economics, Elsevier, vol. 75(1).
    40. Eisenthal-Berkovitz, Yael & Feldhütter, Peter & Vig, Vikrant, 2020. "Leveraged buyouts and bond credit spreads," Journal of Financial Economics, Elsevier, vol. 135(3), pages 577-601.
    41. Chen, Jing & Liu, Xinghe, 2023. "Environmental regulation and stock price synchronicity: Evidence from a quasi-natural experiment in China," International Review of Economics & Finance, Elsevier, vol. 88(C), pages 1513-1528.
    42. Philipp Krueger & Zacharias Sautner & Laura T Starks, 2020. "The Importance of Climate Risks for Institutional Investors," The Review of Financial Studies, Society for Financial Studies, vol. 33(3), pages 1067-1111.
    43. Li, Jing & Huang, Lei & Qin, Yiyang, 2025. "Analyst attention, green credit policies, and corporate environmental responsibility fulfillment," Finance Research Letters, Elsevier, vol. 76(C).
    44. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    45. Li, Zhinan & Pei, Shan & Li, Ting & Wang, Yu, 2023. "Risk spillover network in the supply chain system during the COVID-19 crisis: Evidence from China," Economic Modelling, Elsevier, vol. 126(C).
    46. Dhaliwal, Dan & Judd, J. Scott & Serfling, Matthew & Shaikh, Sarah, 2016. "Customer concentration risk and the cost of equity capital," Journal of Accounting and Economics, Elsevier, vol. 61(1), pages 23-48.
    47. Bethke, Sebastian & Gehde-Trapp, Monika & Kempf, Alexander, 2017. "Investor sentiment, flight-to-quality, and corporate bond comovement," Journal of Banking & Finance, Elsevier, vol. 82(C), pages 112-132.
    48. Fang, Zhenming & Kong, Xiaoran & Sensoy, Ahmet & Cui, Xin & Cheng, Feiyang, 2021. "Government’s awareness of Environmental protection and corporate green innovation: A natural experiment from the new environmental protection law in China," Economic Analysis and Policy, Elsevier, vol. 70(C), pages 294-312.
    49. Thomas E. Schneider, 2011. "Is Environmental Performance a Determinant of Bond Pricing? Evidence from the U.S. Pulp and Paper and Chemical Industries," Contemporary Accounting Research, John Wiley & Sons, vol. 28(5), pages 1537-1561, December.
    50. Silvana Secinaro & Valerio Brescia & Davide Calandra & Buerhan Saiti, 2020. "Impact of climate change mitigation policies on corporate financial performance: Evidence‐based on European publicly listed firms," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(6), pages 2491-2501, November.
    51. Zhongju Liao & Chen Weng & Chen Shen, 2020. "Can public surveillance promote corporate environmental innovation? The mediating role of environmental law enforcement," Sustainable Development, John Wiley & Sons, Ltd., vol. 28(6), pages 1519-1527, November.
    52. Jan Ericsson & Olivier Renault, 2006. "Liquidity and Credit Risk," Journal of Finance, American Finance Association, vol. 61(5), pages 2219-2250, October.
    53. Ni, Jian & Cao, Xiyang & Zhou, Wei & Li, Jiali, 2023. "Customer concentration and financing constraints," Journal of Corporate Finance, Elsevier, vol. 82(C).
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ruan, Qingsong & Li, Chengyu & Lv, Dayong & Wei, Xiaokun, 2025. "Going Green: Effect of green bond issuance on corporate debt financing costs," The North American Journal of Economics and Finance, Elsevier, vol. 75(PA).
    2. Huang, Shupei & Wang, Xinya & Xue, Yi & Zhang, Xinzhi, 2025. "CEOS’ climate risk perception bias and corporate debt structure," Journal of International Money and Finance, Elsevier, vol. 151(C).
    3. Basha, Shabeen Afsar & Benkraiem, Ramzi & Ben-Nasr, Hamdi & Masum, Abdullah-Al, 2025. "Does political risk exacerbate climate risk? Firm-level evidence," International Review of Financial Analysis, Elsevier, vol. 104(PA).
    4. Zhou, Peng & Li, Xiang & Shi, Xing & Jiang, Kun, 2025. "Spillover of the carbon risk along the supply chain: Evidence from the U.S. corporate bond market," Journal of Business Research, Elsevier, vol. 201(C).
    5. Lee H. Seltzer & Laura Starks & Qifei Zhu, 2022. "Climate Regulatory Risk and Corporate Bonds," NBER Working Papers 29994, National Bureau of Economic Research, Inc.
    6. Nguyen, Harvey & Pham, Anh Viet & Pham, Man Duy (Marty) & Pham, Mia Hang, 2025. "Climate change and corporate credit worthiness: International evidence," Global Finance Journal, Elsevier, vol. 64(C).
    7. Xiaolu Hu & Angel Zhong & Youdan Cao & Wenlan Wang, 2024. "The impact of air pollution on cost of debt: Evidence from corporate bond markets," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(4), pages 3495-3533, December.
    8. Zhou, Peng & Mo, Lingyu & Tan, Changchun & Wu, Huaqing, 2025. "Carbon regulatory risk exposure in the bond market: A quasi-natural experiment in China," China Economic Review, Elsevier, vol. 92(C).
    9. Li, Jie & Han, Yingwei, 2025. "Nonlinear hedging climate policy uncertainty: A dynamic mixed copula approach," Economic Modelling, Elsevier, vol. 151(C).
    10. Benkraiem, Ramzi & Dimic, Nebojsa & Piljak, Vanja & Swinkels, Laurens & Vulanovic, Milos, 2025. "Media-based climate risks and international corporate bond market," Journal of International Money and Finance, Elsevier, vol. 151(C).
    11. He, Feng & Ren, Xingzi & Wang, Yueren & Lei, Xingfan, 2025. "Climate risk and corporate bond credit spreads," Journal of International Money and Finance, Elsevier, vol. 154(C).
    12. Nguyen, Minh Nhat & Liu, Ruipeng & Li, Youwei, 2025. "Performance of energy ETFs and climate risks," Energy Economics, Elsevier, vol. 141(C).
    13. Li, Suyang & Qiao, Lu & Ren, Boru & Wang, Zilong, 2025. "Financing sustainability: Sustainable institutional investors and bank loan access," Journal of International Money and Finance, Elsevier, vol. 157(C).
    14. Treepongkaruna, Sirimon & Lhaopadchan, Suntharee & Jiraporn, Pornsit, 2025. "Temporal dynamics of firm-specific climate change exposure: A text-based approach," Research in International Business and Finance, Elsevier, vol. 77(PB).
    15. Chen, Yiyao & Jiang, Fuwei & Zhang, Huajing, 2026. "Central bank green communication and pollution premium: Evidence from China," Emerging Markets Review, Elsevier, vol. 70(C).
    16. Imerman, Michael B. & Ye, Xiaoxia & Zhao, Ran, 2025. "Voluntary disclosures and climate change uncertainty: Evidence from CDS premiums," Journal of Corporate Finance, Elsevier, vol. 94(C).
    17. Doruk, Ömer Tuğsal, 2025. "Climate change exposure and firm value: Evidence from low and middle income economies," Finance Research Letters, Elsevier, vol. 85(PB).
    18. Shima Amini & Sofia Johan & Eilnaz Kashefi-Pour & Abdulkadir Mohamed, 2025. "Climate change risk, investor sentiment, and the performance of new entrant firms," Small Business Economics, Springer, vol. 65(4), pages 2539-2566, December.
    19. Tristan Jourde & Arthur Stalla-Bourdillon, 2026. "Environmental preferences and sector valuations," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 162(1), pages 45-85, February.
    20. Fan, Lin & Wang, Jiali & Lin, Zhongguo & Du, Huibin, 2025. "Official environmental credit evaluation and corporate debt concentration," International Review of Financial Analysis, Elsevier, vol. 104(PA).

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:riibaf:v:77:y:2025:i:pa:s0275531925001771. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ribaf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.