Green bond issuance and corporate cost of capital

This study investigates the impact of issuing green bonds for environmental protection initiatives on the corporate cost of capital. Accounting for nearly 2 percent of corporate bonds annual issuances during 2016–2020, in China, green bond issuance plays an increasingly important role in the economy. By matching green bonds with conventional corporate bonds based on propensity matching scores, we find that green financing policies not only reduce the cost of debt but also lower the overall cost of capital of green bond issuers. We hypothesize that green projects help lower the corporate cost of capital in three channels: (i) reducing information asymmetry, (ii) improving security liquidity, and (iii) lowering bond issuers’ perceived risk. Our empirical findings are consistent with these expectations. Specifically, we find that the corporate cost of capital—regardless of whether it is measured by the implied cost of capital or by the weighted average cost of capital—is significantly lowered after the issuance of green bonds through these three channels. Collectively, the findings suggest a specific venue for environmental protection initiatives that affect company's value positively.