Bond Returns Research Articles

Geopolitical turmoil and investor green preference: Evidence from the corporate bond market

In this study, we analyze a sample of 1,630 corporate green bonds issued internationally between November 2012 and January 2024 to investigate the yield differences between green and non-green bonds. Our findings reveal a small greenium, particularly significant in the secondary market among carbon-intensive industries, first-time green bond issuers, and riskier issuances. We show that Geopolitical Risk (GPR) significantly influences the greenium in the secondary market, primarily driven by geopolitical acts rather than threats. Additionally, we establish that third-party certifications and corporate exposure to environmental risk are critical in explaining the GPR-greenium relationship. These results underscore the importance of GPR in enhancing investor preference for green bonds, offering important implications for both practice and policy.

Correction: The impact of green bond issuance on carbon emission intensity and path analysis

Correction: The impact of green bond issuance on carbon emission intensity and path analysis

How does informed trading affect credit bond spreads: Evidence from China's interbank bond market

China's interbank bond market is an institutional investor market, and transactions are more information-based. Whether and how informed trading can affect credit bond pricing is an urgent problem to be solved in the study of China's bond asset pricing. This paper uses credit bond issuance and trading data and stock high-frequency trading data from May 2014 to December 2020 to construct informed trading probability and bond liquidity indicators. Using regression analysis and adjustment and mediation effect test methods, this paper studies the impact of informed trading on China's interbank credit bond pricing and the channel role of liquidity. The results show that the probability of informed trading has a significant positive impact on credit bond spreads. Informed trading leads to an increase in credit bond spreads by amplifying bond illiquidity. The amplifying effect of informed trading on credit bond spreads is stronger for bonds with high illiquidity. The amplifying effect of informed trading on credit bond spreads will be stronger in private enterprises, enterprises with low information transparency, and high debt ratios. This study reveals the risk nature of informed trading in China's interbank bond market, which helps to deepen the understanding and management of the bond market.

Going Green: Effect of green bond issuance on corporate debt financing costs

This paper investigates the influence of green bond (GB) issuance on the credit spread of non-green bonds (NGBs) issued by the same firm. Based on Chinese bond market data from 2013 to 2021, our results show that GB issuers experience a decline in NGB credit spreads after issuing GBs, indicating that “going green” can lower corporate debt financing costs. This beneficial effect is more salient among firms with lower bond liquidity, supporting the “bond liquidity story” that investors anticipate increased bond liquidity following GB issuance and thus charge lower credit spreads. In contrast, we find limited evidence for alternative explanations such as the “default risk story,” “halo effect story,” or “information asymmetry story.” Our research highlights the financial benefits of GB issuance and contributes to related literature on the economic implications of green finance. The findings also offer valuable insights for policymakers and corporate executives seeking to promote sustainable investment.

The effect of bond ownership structure on ESG performance

We examine whether firms' ESG performance is influenced by bondholder preferences. We argue that insurance companies have unique incentives to monitor bond issuers' ESG performance because insurers face enhanced exposures to ESG shocks in their balance sheets and trading operations. Consistent with this argument, we find that firms with higher bond ownership by insurance companies are associated with higher future ESG ratings. To address potential identification concerns, we test changes in bond issuers' ESG ratings following the initial bond investment by insurance companies. We find that firms' ESG performance improves after insurance companies' initial bond investment. We also find that this improvement in ESG performance is concentrated in firms with greater reliance on bond financing and investment capital from insurance companies. Our study underscores the importance of bond ownership structure in influencing corporate ESG performance.

Green bonds and corporate Environmental social and governance performance: Innovative approaches to identifying greenwashing in green bond markets

AbstractThis study examines the impact of green bond issuance on companies' environmental social and governance (ESG) performances and greenwashing behavior of a sample of Chinese‐listed firms. We find that the issuance of green bonds significantly bolsters corporate ESG performance through the financing and signaling mechanisms. The moderating effect of policy uncertainty proves to have a mutually reinforcing effect on the impact of green bonds on ESG performance. By signaling the commitment to green and low‐carbon transformation, the issuance of green bonds offsets the negative effects of policy uncertainty on firm's ESG performance. Extended analysis on greenwashing discerns no notable differences among firms with different polluting conditions and politically connected levels. The issuance primarily improves environmental (E) and social (S) dimensions, with negligible influence on the governance (G) aspect of ESG. Our findings suggest that a potential propensity of greenwashing in China's green bond market.

Transnational Climate Governance and State Capacity: A Multilevel Analysis of Green Bond Certification

Abstract Green bonds have become a key instrument for combating the climate crisis. To mitigate the risk of greenwashing, nongovernmental organizations and market participants have established transnational standards and certification schemes for the global governance of green bonds. This research aims to explain the variation in the adoption of certification across bonds and countries. By analyzing a data set of 4,682 green bonds from fifty-five countries between 2016 and 2020, the multilevel mixed-effects models indicate that an increase in participants in the Task Force on Climate-Related Financial Disclosures within a country positively correlates with the likelihood of domestic green bond issuers adopting the certification from the Climate Bonds Initiative (CBI). In countries with stronger state capacity to adopt climate laws and policies, green bond issuers are more likely to participate in the CBI certification. This study has implications for addressing the issue of greenwashing in the development of the green bond market.

Under Treasury Control: Japan’s Emergence as an Egalitarian, Small-government State

This study analyses the formation of a policy system that reduced income inequality in Japan in the 1960s, a period of rapid economic growth. According to comparative research, the Japanese state is an example of small government with income equality. Japan’s income inequality rose in the 1950s, and at that point, the government faced a decision about how to reduce income inequality, and particularly whether to expand social security and government size. This study uses primary materials to analyse how and why Japan became more egalitarian while maintaining a small-government state, focusing on fiscal rules set by the Ministry of Finance, which adopted a balanced budget rule that prevented the issuance of public bonds and limited the tax burden ratio. As reflected in the government’s Income Doubling Plan, this development led to a trade-off among factors, such as social security, public works, and tax cuts, which led to the subordination of social security. Despite public debt issuance in 1965, which was contrary to two fiscal rules, social security did not expand because of fiscal rigidification. Throughout the 1960s, spending on public works and income tax cuts was prioritised over social security, resulting in small government but also income equality.

Drivers of local government borrowing in China: Fiscal hunger and competition game under asymmetric decentralization

This paper contributes two mechanisms through which asymmetric fiscal decentralization drives local government borrowing: ‘fiscal hunger’ (borrowing to address budgetary fiscal gaps, leverage land resources, and pay off existing loans) and ‘competition game’ (borrowing to compete for bond issuance and state funds). Analyzing a dataset of 290 Chinese cities from 2006 to 2015, we find local government borrowing is driven by both fiscal hunger and inter-city competition. Borrowing is not confined to the growth-oriented purpose. Our Geographically Weighted Panel Regression uncovers the spatial patterns of two borrowing mechanisms, in which borrowing in less-developed regions is predominantly driven by fiscal hunger, while developed coastal regions actively engage in inter-city competition through borrowing. These dynamics may aggravate fiscal disparities among Chinese cities.

Does the issuance of green bonds promote green practices among peer companies? Evidence from China's listed companies

In China's green finance system, green bonds, which strive to achieve balanced development of ecological and economic goals, play a key role in promoting sustainable development. Using ESG data on Chinese listed companies from 2009 to 2022, this paper examines whether green bonds issued by companies encourage their peers to adopt green practices. And then, based on the multi-temporal Difference-in-Differences (DID) approach, this paper explores the underlying mechanisms and heterogeneous effects of this peer influence. The results show that green bond issuance has a significant positive impact on the green practices of peer companies, and its robustness has been confirmed through various tests. Peer effects are primarily driven by competition and access to information, which is particularly evident in highly competitive industries and companies with common institutional investors. In addition, the impact of green bonds issued by industry leaders or high-polluting enterprises will be greater. In order to promote sustainability in different business types and regions, specific policy implications are provided based on these insights: strengthening the green bond guarantee system, fostering market leadership, and implementing targeted regulations.

Does the impact of credit rating downgrade on bond returns vary by region: Empirical evidence from China

Utilizing trading data from corporate and enterprise bonds that experienced credit rating downgrades between 2012 and 2022, this study employs event study methodology and regression analysis to examine the regional differences in the impact of credit rating downgrades on bond pricing and the mechanisms behind these effects. The study found that, during the window period when the bond credit rating is downgraded, there is a significant difference in the cumulative abnormal return of bonds between the eastern and non-eastern regions. Heterogeneity analysis indicates that bonds with higher credit ratings and those issued by non-state-owned enterprises are more significantly affected by credit rating downgrades. This study provides empirical evidence of regional disparities in the impact of credit rating downgrades, and proposes a theoretical mechanism whereby differences in the degree of marketization influence these effects through varying expectations of government implicit guarantees. The findings offer a theoretical foundation for optimizing decision-making by participants in the Chinese bond market.

Study on the Tort of Misrepresentation in the Inter-bank Bond Market--Taking Case No. 1 of the Beijing Financial Court as an Example

Chinese interbank bond market dates back to June 1997, when the People's Bank of China decided to open an interbank bond trading business at the National Interbank Lending Center, which was formally established. In the following years, this market developed relatively fast, and in June 2002, the bond counter market of commercial banks began to operate, which to a certain extent made the interbank bond market, which institutional investors dominate, expand through the counter trading for all kinds of investors in the whole society.In recent years, applying direct financing tools such as corporate bond issuance has become increasingly widespread. This paper takes Beijing Financial Court Case No. 1 as an example to study in detail the important reasons for the emergence of this type of infringement, focusing on the obligations and responsibilities of each participant, including the issuer Dalian Machine Tool Group, the intermediary bank Industrial Bank, and the investor Bluestone Capital Management. This paper aims to sort out the obligations and responsibilities of each participant in the inter-bank bond market to find out the reasons for the emergence of the phenomenon of misrepresentation and to explore the issues that appear to be suitable for this paper to find out the causes of misrepresentation, explore the operation rules and risk prevention measures of the interbank bond market that are suitable for China's national conditions, to solve the problems of misrepresentation, standardize the obligations and responsibilities of all parties, and promote the development of China's interbank bond market.

Western diplomacy and state access to capital

What determines government access to capital? Conventional explanations of state credit access rest on tenuous assumptions and fail to fully elucidate market behavior seen in recent years. This article argues that investors evaluate governments based on their diplomatic ties to the West. Specifically, diplomacy with major Western powers serves as a heuristic which signals to market actors that the debtor state is a trustworthy borrower with low default risk. Focusing on in-person diplomacy with the United States, I construct a new data set, the United States Economic Diplomacy (USED) Data, which codes over 5,000 meetings between the US President, US Treasury Secretary, and high-level foreign policymakers from 1990 to 2016. Among a sample of 110 countries, the statistical results uncover evidence of a significant but conditional “Western advantage” in sovereign bond markets. Greater diplomatic ties to the United States are associated with higher volumes of bond issuance. This advantage, however, manifests itself primarily when global capital is scarce and reverses as lower global interest rates incentivize greater risk-taking among investors.

Do regional trusts alleviate bond market risks? Evidence from the Chinese municipal corporate bond pricing

Municipal corporate bonds have attracted significant attention due to their pricing mechanisms and reflect China's distinct financial landscape. Existing research has highlighted the influence of informal institutional factors on bond pricing. This study introduces the social trust index to measure regional trust levels and assesses its correlation with municipal corporate bond issuance pricing. The empirical analysis indicates that higher regional trust levels are significantly associated with reduced issuance credit spreads for municipal corporate bonds. The relationship is moderated by local economic development and the strength of implicit government guarantees. Employing the “Yongmei” event as a case study, this research explores the dynamics of bond pricing mechanisms following a reduction in government implicit guarantees and finds that a weakening of these guarantees intensifies the influence of regional trust on credit spreads. Additionally, default events are observed to have spillover effects, impacting neighboring provinces and the overall market. This research extends the investigation of regional trust's pricing mechanisms to the municipal corporate bond market, thereby enriching the study of informal institutions' impact on financial market pricing. The findings underscore the importance of effectively harnessing market mechanisms by governments to mitigate risks in the municipal corporate bond sector.

Should underwriters be trusted? Reducing agency costs through primary market supervision

We examine the mandated introduction of a supervised auction framework within China's primary bond market. This regulatory intervention resulted in a substantial reduction in debt costs for Chinese Bond issuers, primarily attributed to the alleviation of agency conflicts between underwriters and issuers. Leveraging unique bidder-level data obtained from a lead underwriter, our study provides replicable tools to discern collusive bidding behavior. This sheds light on instances of artificially inflated bond yields, highlighting economically burdensome practices. Our findings can assist regulators, issuers, and investors engaged in unsupervised auction mechanisms. Our insights offer potential enhancements to regulatory frameworks and operational efficiency across various sectors, including securities issuance, construction projects, and procurement.

Study on the Two-Way Promotion Path of Green Financing for SMEs and Green Transformation of Urban Housing Projects in Guangdong Province in the Era of Digital Economy

Green transformation is a necessary path on the road of green development of small and medium-sized enterprises (SMEs), and it is also a top priority for implementing the concept of sustainable development. The article innovatively proposes a green transformation evaluation method for urban housing projects based on the ecological footprint theory, which clarifies the resource use of urban housing projects during the construction process through the ecological footprint calculation, clarifies their ecological deficits, and solves the reduction of their ecological footprints through the green transformation. A double-difference model is introduced to analyze the impact of SMEs’ green financing and issuance of green bonds on the green transformation of urban housing projects. The short-term market response of green bonds issued by SMEs with green financing and the environmental benefits of urban housing projects are also verified. Between 2012 and 2021, the ecological footprint of urban housing projects in Guangdong Province increased by 36,273,366 nha, an increase of 137.04%, and the reduction of ecological footprint in the planning and construction phase of urban housing projects in Guangdong Province after the implementation of the green transformation strategy totaled 10,377.85 nha. Whenever the level of SMEs’ green financing and issuance of green bonds is increased by 1%, the reduction of ecological footprint of the green transformation of urban housing projects will be increased by 1%. Transformation of the ecological footprint reduction will be enhanced by 4.059. Relying on the green financing behavior of SMEs can promote the enhancement of the short-term market effect of the enterprise, and can also effectively enhance the utilization rate of green building materials in urban housing projects, and help the green transformation of urban housing projects.

Impact of green bond issues on Euronext firms’ stock abnormal returns

Climate change is forcing countries to take strategic measures to reduce the negative impact on future generations. In this context, sustainable finance has played a key role in sustainable development since the establishment of environmental, social and governance principles. The underlying market has developed rapidly since its inception, with green bonds being the most prominent instrument. This article aims to study the impact of green bond issues on the abnormal stock returns of stocks listed on the main Euronext indices. The sample includes 58 issues carried out between 2014 and 2022 by 21 different firms listed on the AEX (Netherlands), BEL 20 (Belgium), CAC 40 (France), ISEQ 20 (Ireland), OBX (Norway) and PSI (Portugal) indices. The methodology follows the procedures of the event study using the market model. The results show significant positive stock price reaction on the issue date. After the abnormal losses just before the issues, suggesting the reserves of this consolidating market, abnormal gains persisted for over a week, providing evidence against the weak efficiency Euronext’s financial markets. The findings are useful for policy makers and entrepreneurs to promote innovative initiatives that encourage the financing and development of environmentally sustainable infrastructures.

Financial integration and hedging and safe haven properties of metals for sovereign bonds

Previous research has shown that industrial metals outperform gold and other precious metals in terms of hedging and safe haven properties for sovereign bond holdings. We argue that the strength of these properties depends on how much the sovereign bond is globally integrated. We therefore model the hedging and safe haven properties of metals for sovereign bonds as moderated by how much bond returns are globally integrated. Our evidence from the sovereign bonds of 24 countries shows that industrial metals provide a stronger hedge and safe haven when sovereigns are more integrated, whereas precious metals do not. The inflation and exchange rates also affect the hedging properties of metals, but bond integration has the strongest economic effect. This evidence helps explain why metals are excellent hedging or safe haven assets for some sovereign bond investors but not for others.

Climate risks, corporate bonds, and economic uncertainty

We test for the existence of climate change risks in corporate bond returns. Using risk factors based on textual analysis of news articles, we estimate the sensitivity of bonds to climate change news. Bonds that covary highly with global warming news earn lower returns. We also test whether economic policy uncertainty moderates the relationship between bond returns and climate news risk. The lower returns to high climate-risk bonds are driven by periods of high economic policy uncertainty. Therefore, investors increase their demand for bonds that perform better in periods of high global warming risks, especially when economic uncertainty is high.

Pricing of sustainability-linked bonds

We examine the pricing of sustainability-linked bonds (SLBs), where the cash flows depend on the bond issuer achieving one or more Environmental, Social and Governance (ESG) goals. Investors are willing to accept a 1–2bps lower yield due to the bond’s ESG label, providing evidence of investors caring about environmental impact. Furthermore, we find the average probability of missing the target is 14%–39% so firms set ESG targets that are easy to reach. We find that the SLB market is efficient: the prices of SLBs depend strongly on the size of the potential penalty and there is no evidence of mispricing. Finally, our results suggest that SLBs serve as financial hedges against ESG risk.