Reaction of Share Prices to Announcement of Green Bond Issuance in Europe : A study analysing the impact of financial leverage

Abstract

Green bonds is a concept with immense popularity in present business context, given the increased need for the corporates to operate in an environmental friendly manner, in order to ensure long term survival in the market. When analysing the previous studies conducted on the same arena, it was understood that most of the studies were done at a global level. Accordingly, given the significant position Europe holds in terms of green bonds, a research gap was identified due to limited number of studies focusing on the Europe region. Therefore, this thesis primarily aims at understanding the share price reaction to green bond issuance announcements in Europe, while focusing on evaluating whether the financial leverage of corporates accounts for any impact on this stock price reaction. This reaction was evaluated using a sample of 93 green bond issuance announcements in Europe for the period from year 2014 to year 2024.

The event study methodology was used in the thesis to evaluate this relationship between the stock price reaction and the green bond issuance announcements, while calculating the cumulative abnormal returns across an array of event windows selected for the study. The Wilcoxon signed rank test was used to evaluate the significance of the results derived from the event study methodology and the regression analysis was also conducted to understand whether any company or bond specific characteristics have an impact over this stock price reaction to green bond issuance announcements.

The results derived from the event study were not statistically significant across all the event windows identified, suggesting that the stock market does not necessarily reacts to the green bond issuance announcements by publicly listed non-financial corporates in Europe. The regression analysis conducted also generated insignificant results showcasing that the independent variables, which includes the company and bond specific characteristics do not hold a material impact on the reaction of stock prices to green bond issuance announcements. These results can be interpreted with the prominent position Europe holds in the green bond market making green bond issuance mostly a routine task or a norm in the market.

The findings of this study, contribute to the literature while facilitating the understanding on how the markets in which being environmental friendly has been a part of its daily tasks, react to these eco-friendly events such as green bond issuance announcements. Also, this facilitates the company managers in incorporating the understanding on stock market reaction to green bond issuance announcements to day to day corporate decision making, while exploring innovative ways through which the corporates can be more favourable towards the environment and community.