In recent years, with the widespread concern about the climate crisis, green sustainable development has become a global hot topic. Since the seven ministries and commissions including the People’s Bank of China issued the “Guidance on Building a Green Financial System” in 2016, in which green bonds are taken as one of the important instruments, green bonds have grown rapidly in China’s bond market. So, under the favorable policy environment of green finance, do green bonds attract investor preference? What is the transmission mechanism and the context in which it works? Do green bonds effectively play the role of fund allocation and really promote the flow of funds to green sustainable development?

Based on the above issues, using the green bonds and corporate bonds issued in China’s bond market from 2016 to 2020, this paper explores the relationship between green bonds and credit spreads. It is found that compared to ordinary bonds, green bonds issued are more likely to attract investor preference, which is reflected in lower credit spreads, and this finding remains unchanged after robustness tests such as the PSM test and the instrumental variable method. At the same time, this preference mainly stems from the lower-level information risk associated with higher ratings and green certification by authoritative agencies. Further tests find that green bonds have significant advantages in reducing financing costs, especially when there are more bond issues, longer bond maturities, and higher bond information risk faced by investors such as non-returnable bonds, low reputation of underwriters, and small issuer size. In addition, this paper also finds that green bond issuers have made more green innovations and green applications.

The possible contributions of this paper are that: First, green bonds are emerging in China, but related research is still limited, and only a few scholars have explored whether green bond issuance in China brings lower credit spreads. This paper provides an in-depth analysis of the relationship between green bonds and credit spreads based on the information asymmetry theory, signaling theory, and social identity theory, and further analyzes the cross-sectional differences of bond characteristics, issuers, and underwriters to broaden the theoretical explanation of the impact of green bonds on credit spreads. Second, the existing literature studies the relationship between green bonds and credit spreads from the perspective of bond issuers, while this paper systematically examines the direct mechanism of green bonds on credit spreads from the perspective of investors’ risk perceptions, which further complements the influencing factors of investor preference in the bond market, and provides empirical evidence for the smooth issuance of green bonds. Third, this paper purposefully examines the use of funds raised from the issuance of green bonds in green-related aspects, and the findings are of great practical significance for further improving China’s green financial market, optimizing fund allocation, and thus promoting green sustainable development.