Determinants of Firms’ Choice between Green and Conventional Bonds: Why is the Corporate Green Bond Market Still so ‘Green’?

Abstract

Despite the substantial increase in green bond issuance over the past decade, corporate green bonds still only represent a small fraction of total bond issuance, and evidence on the drivers and costs of corporate green bond issuance is lacking. Drawing from the distinct features of green bonds and relevant theories, we develop four novel hypotheses on the determinants of firms’ choice between green and conventional bonds. We test these on a sample of green and conventional bonds issued by the US, Western European, and Chinese firms between 2012 and 2021, using rare events logistic regressions to account for the very small fraction of green relative to conventional bonds. Consistent with our hypotheses, firms with lower costs of disclosure, higher reputational gains from being seen as green, and a stronger focus on innovation are more likely to issue green instead of conventional bonds. Conversely, we only find weak evidence that borrowing constraints drive green bond issuance. We uncover cross-industry and cross-country differences in green bond issuance motives and find evidence of increased green bond issuance since the start of the COVID-19 pandemic. Our findings, which survive several robustness tests, are relevant for corporate managers and bond market regulators.

Keywords: Sustainability, green bonds, corporate financing choice, disclosure costs, borrowing constraints, environmental performance, innovation

JEL Classification: G19, G30, M14