When public money speaks: local government special bonds and corporate green innovation in China

Public investment reallocates both resources and expectations. This study examines this dual role through China’s local government special bonds, a project-based fiscal instrument that reveals local governments’ green development priorities through observable and spatially targeted spending commitments. We construct a novel dataset of 146,601 special bond projects from 2019 to 2024, identify county-level allocations to the new-energy sector, and match them with Chinese A-share listed firms. We find that new-energy special bond allocation significantly increases corporate green innovation. The result is robust to alternative measures, Tobit estimation, winsorization, placebo tests using non-green patents, dynamic DID analysis, Bartik instrumental variables, propensity score matching, and entropy balancing. Mechanism tests show that corporate climate risk attention, measured from annual reports, partially mediates the effect, suggesting that targeted public investment guides managerial attention in addition to supplying capital. The effect is stronger where policy signals are more credible or easier to absorb, including regions with developed venture capital markets, carbon pilot cities, and projects using bond funds as capital. Executive green background further strengthens firms’ innovation response. These findings show how place-based public investment transforms fiscal allocation into corporate climate cognition and green innovation.