Green Bonds Pay When Trustworthy

36 Pages Posted: 13 May 2023 Last revised: 30 May 2023

See all articles by Sang Baum Kang

Sang Baum Kang

Illinois Institute of Technology - Stuart School of Business

Jiyong Eom

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

Date Written: May 28, 2023

Abstract

Green bonds are a form of bonds whose proceeds should be exclusively used for green projects. The green bond premium or greenium is the difference in yield between a green bond and the otherwise-identical brown bond. We propose a stylized model in which the size of the premium is affected by investors' trust in the issuer using green bond proceeds responsibly and the market's expectations of the issuer's financial soundness. Using a matching method to compare bond yields at the time of issuance, our empirical analysis offers three novel findings in line with the predictions of our model. First, green bonds save funding costs compared to their brown counterparts. Second, the green bond premium is more negative - indicating less funding costs - for firms exposed to higher carbon transition risk and stronger management capabilities in this area. Last, the green bond premium is more negative for non-investment grade bonds.

Keywords: green bond, cost of funding, green premium, transition risk

JEL Classification: G12, G41, Q54

Suggested Citation

Kang, Sang Baum and Eom, Jiyong, Green Bonds Pay When Trustworthy (May 28, 2023). KAIST College of Business Working Paper Series, Available at SSRN: https://ssrn.com/abstract=4447509 or http://dx.doi.org/10.2139/ssrn.4447509

Sang Baum Kang (Contact Author)

Illinois Institute of Technology - Stuart School of Business ( email )

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Jiyong Eom

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

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