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Why Do Firms Issue Green Bonds?

Author

Listed:
  • Julien Xavier Daubanes

    (University of Geneva)

  • Shema Frédéric Mitali

    (Ecole Polytechnique Fédérale de Lausanne)

  • Jean-Charles Rochet

    (Swiss Finance Institute; University of Geneva - Geneva Finance Research Institute (GFRI); University of Zurich - Swiss Banking Institute (ISB))

Abstract

Green bonds allow firms to commit to climate-friendly projects. Equity investors react positively to their announcement. Based on prior empirical studies, we suggest that green bond commitments help managers signal the profitability of their green projects and that they do so because they are sensitive to their rm's stock price. We present a signaling model in which firms undertake green projects not only because of carbon penalties but, additionally, because of managerial incentives, predicting that the role of the former is augmented by the latter. We test this prediction by exploiting both cross-industry differences in the stock-price sensitivity of managers' pay and in stock share turnover, and cross-country variations in effective carbon prices. Our results not only support the role that our theory ascribes to managerial incentives, but also show that this role mainly depends on carbon pricing. Green bonds are not substitutes to carbon pricing. On the contrary, the latter is essential to the effectiveness of the former.

Suggested Citation

  • Julien Xavier Daubanes & Shema Frédéric Mitali & Jean-Charles Rochet, 2021. "Why Do Firms Issue Green Bonds?," Swiss Finance Institute Research Paper Series 21-97, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2197
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    Citations

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    Cited by:

    1. John Caramichael & Andreas Rapp, 2022. "The Green Corporate Bond Issuance Premium," International Finance Discussion Papers 1346, Board of Governors of the Federal Reserve System (U.S.).
    2. Mireille Chiroleu-Assouline & Mouez Fodha, 2023. "Debt, tax and environmental policy [Dette, taxe et politique environnementale]," Post-Print halshs-04181981, HAL.
    3. Mireille Chiroleu-Assouline & Mouez Fodha, 2023. "Dette, taxe et politique environnementale," Revue française d'économie, Presses de Sciences-Po, vol. 0(1), pages 55-106.

    More about this item

    Keywords

    Green bonds; Green finance; Climate policy; Carbon pricing; Managerial incentives; Short-termism;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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