The relationship between corporate green bond yields and firm leverage

Abstract

Green bonds, whose proceeds are used towards environmental-friendly projects, are still perceived as a relatively new financial instrument with the first Green bond being issued in 2007. However, the market is growing rapidly worldwide since its debut with almost 700 Green bonds and approximately $200bn issued in 2020. Several authors have already conducted studies regarding Green bond premiums and pricing. They have focused their studies either on municipalities and corporations, like Flammer (2018), Baker et al. (2018), Tang and Zhang (2018), (Zerbib 2019) among others. In this work we manually collect information on a large set of Green bond issuers and examine specifically Corporate Green Bonds and, more importantly, the relationship between the Yield to Maturity (YTM) of a Green Bond and the Leverage ratio of its issuer. For this, we have used a database composed by 2,054 Green Bonds and 37,771 Conventional Bonds for 956 unique issuers. First, the results suggest that Green bonds have a negative premium i.e., the YTM of a Green bond is lower than the YTM of a Conventional bond: on average, the mean YTM is -0.971 basis points for Green Bonds. When we look exclusively at Green Bonds and by studying the relationship between the YTM and the Leverage ratio from the issuer, our results shows that the YTM will be lower with a higher Leverage ratio from the issuer (-0.0850 basis points), meaning if the issuer has several issued bonds with a higher leverage, the YTM of a Green bond will be lower.

Date of Award	28 Jun 2021
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Diana Bonfim (Supervisor)