Green lending and stock price crash risk: Evidence from the green credit reform in China

Extant literature has under-theorized the equity market consequences of green credit reform. Our study addresses this gap by investigating the impact of green credit reform on stock price crash risk. Using the promulgation of the 2012 Green Credit Guidelines (GCGs) as a quasi-natural experimental setting, our results show that green lending significantly reduces high-polluting firms’ stock price crash risk; and that the enhanced bank monitoring which green credit brings, both of accounting information quality and of corporate capital structure, serves as the mechanism underlying this causal effect. Cross-sectional analyses reveal that the reduction is more pronounced when banks face greater competition, and for firms without bank-client relationships or political connections. Overall, our study contributes to a finer-grained understanding of the equity market consequences of green lending and sheds new light on the determinants of stock price crash risk.