Role Of Green Finance for Signaling Sustainability in Corporate Debt Decisions

Abstract

This research investigates the role of green financing in determining corporate debt levels and their costs in pakistan. It focuses on green investment, green credit, and green securities, while also exploring sectoral variations across energy, cement, textile, pharma, and fertilizer. Firm-specific factors such as age, size, liquidity, and financial performance are also considered in corporate debt decisions. The study utilizes secondary data from bloomberg, refinitiv, and company sustainability reports, covering 120 listed firms from 2016 to 2023. Panel data models, including fixed effects, random effects, and pooled ordinary least squares, are applied. The results show that green credit significantly enhances both short-term and long-term debt across all sectors. Green investment is also positively associated with both short- and long-term debt, with stronger effects on long-term financing. Green securities; however, shows a significant impact only on short-term debt, while its effect on long-term debt remains insignificant, highlighting the limited maturity of green securities markets in Pakistan. Sector-specific analysis reveals that in industries such as textile, adopting green credit and green investment lowers the cost of debt financing, suggesting that green finance instruments reduce borrowing costs by signaling lower credit risk. Moreover, firm size and age significantly influence debt accessibility, with larger and older firms securing better financing terms, consistent with signaling theory (Chinonso & Zhen, 2016). This study contributes to green finance literature by demonstrating how different instruments vary in effectiveness across financing horizons and sectors. Policymakers are advised to incentivize green credit and green investment adoption, particularly in highly polluting industries such as cement and energy, while strengthening regulatory frameworks for green securities to enhance their role in long-term financing.