Green Bond Issuances and Corporate Cost of Capital

54 Pages Posted: 30 Apr 2021 Last revised: 12 Aug 2021

See all articles by Ran Zhang

Ran Zhang

University of Science and Technology Beijing

Yanru Li

University of Science and Technology Beijing

Yingzhu Liu

University of Science and Technology Beijing

Date Written: April 16, 2021

Abstract

This study investigates the impact of issuing green bonds for environment 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 essential role in sustainable development. By matching green bonds with conventional corporate bonds based on propensity matching scores, we find a 24.9 bps negative green premium on average. 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 affects s company’s value positively.

Keywords: Green bonds, Cost of capital, Stock Liquidity, Information asymmetry, Firm risk

JEL Classification: G10

Suggested Citation

Zhang, Ran and Li, Yanru and Liu, Yingzhu, Green Bond Issuances and Corporate Cost of Capital (April 16, 2021). Available at SSRN: https://ssrn.com/abstract=3832510 or http://dx.doi.org/10.2139/ssrn.3832510

Ran Zhang (Contact Author)

University of Science and Technology Beijing ( email )

30 Xueyuan Road, Haidian District
Beijing, 100083
China

Yanru Li

University of Science and Technology Beijing ( email )

30 Xueyuan Road, Haidian District
beijing, 100083
China

Yingzhu Liu

University of Science and Technology Beijing ( email )

30 Xueyuan Road, Haidian District
beijing, 100083
China

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