Why Do Firms Issue Green Bonds?

Julien Xavier Daubanes, Shema Frédéric Mitali and Jean-Charles Rochet

January 2022

Corporate green bond announcements generate positive abnormal stock returns. We suggest this might be because managers use green bonds to signal the profitability of the climate-friendly projects they finance. First, we build a signaling model of green bond issuance. It predicts that firms’ incentives to decarbonize are amplified by the interest of their managers in their stock price. Second, we provide supporting empirical evidence, using cross-country variations in effective carbon prices and cross-industry differences in the stock-price sensitivity of managers’ compensation. Our results suggest that green bonds are not substitutes for but rather complements to carbon pricing.

JEL classification: D53; H23; G14; Q54.

Keywords: Green bonds; Green finance; Climate policy; Carbon pricing; Managerial incentives.