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Why do firms issue green bonds?
Research paper co-authored with Shema Frédéric Mitali (Ecole Polytechnique de Lausanne) and Jean-Charles Rochet (Univ. of Geneva and Toulouse School of Economics)
Green bonds allow firms to commit to climate-friendly projects. Shareholders react positively to their announcement. Based on prior empirical studies, we suggest that green bond commitments help managers signal the profitability of their green projects and that they do so because they are sensitive to their firm's stock price. We present a signaling model in which firms undertake green projects not only because of carbon penalties but, additionally, because of managerial incentives, predicting that the role of the former is augmented by the latter. We test this prediction by exploiting both cross-industry differences in the stock-price sensitivity of managers' pay and in stock share turnover, and cross-country variations in effective carbon prices. Our results not only support the role that our theory ascribes to managerial incentives, but also show that this role mainly depends on carbon pricing. With green bonds, governments do not avoid carbon pricing. On the contrary, the latter is essential to the effectiveness of the former.
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