In order to reduce the emission of formaldehyde of plywood and improve the utilization of lignin, isolated lignin was successfully prepared from wood chips with polyethylene glycol (PEG) 400 at the various weight ratios. The characterization was determined with thermogravimetry, Fourier transform infrared spectroscopy, 13C‐nuclear magnetic resonance analysis, and dynamic viscosity measurement. The results showed that more PEG moiety were grafted at alpha carbon position of lignin structure on increasing the weight ratio, resulting in the poorer thermostability and more formation of hydrogen bonding. Isolated lignin prepared with weight ratio of 1:4 exhibited the best dynamic viscosity property among all, and the lignin‐based three‐ply plywood which meets the shear strength requirement for type II plywood according to GB/T17657‐2013 were fabricated. Accordingly, isolated lignin with PEG‐400 could be considered as a promising adhesive for preparation of formaldehyde‐free plywood. POLYM. COMPOS., 39:484–490, 2018. © 2016 Society of Plastics Engineers