Financing a Green Future: Credit Ratings and Green Innovation in China

Abstract

Using panel data on Chinese A-share listed firms and issuer credit ratings (CR) from 2007 to 2021, this paper investigates how CR affects the quantity and quality of firms' green innovation and the underlying mechanisms. The findings are as follows. First, higher CR significantly increases both the quantity and quality of green innovation. This incentive effect is more pronounced for firms in the growth and maturity stages as well as for heavily polluting firms, suggesting that CR may help mitigate stage- and domain-related mismatches. Second, stronger CR helps firms ease financing constraints, reduce financing costs, and attract greater attention from green capital markets. Stronger CR also broadens financing channels by expanding the scale of debt and bank-credit financing while reducing reliance on equity financing. Through these channels, issuer credit ratings improve firms' external financing conditions and thereby promote both the quantity and quality of green innovation. Third, green innovation is positively associated with ESG-related external evaluations, whereas its short-term effect on firms' economic performance remains limited. This paper highlights the important role of issuer credit ratings in shaping corporate financing and green innovation in capital markets and has implications for further improving corporate information disclosure, refining the issuer credit rating system, enhancing both the quality and scale of green innovation, and ultimately advancing China's innovation-driven development and green growth.