Why do institutional investors buy green bonds: Evidence from a survey of European asset managers

Using survey evidence from European asset managers, we provide insights into their green bond investment activities and the factors that affect their investment decisions. We find that the majority of investors are actively invested in the green bond market via a variety of investment channels. Investors prefer green bonds issued from corporate issuers and sovereigns and we find that there is strong unmet investor demand for green bonds from these issuer types, in particular from non-financial corporates in the industrials, automotive and utilities sectors. Competitive pricing and strong green credentials, both pre- and post-issuance, are the most frequently named factors impacting respondents' decision to invest in a green bond, and unclear and poor reporting on how bond proceeds are allocated to green projects induces a majority of investors to not invest in a green bond or to sell a bond if already included in the portfolio. Among policy measures to grow the green bond market, preferential capital treatment for low-carbon assets and minimum standards for green definitions receive the highest investor support, but respondents are divided whether a strict definition of ‘green’ or a less strict definition would be more beneficial for scaling up the green bond market.     

The Role and Impact of Financial Advisors in the Market for Municipal Bonds

Significantly more and more issuers of municipal bonds use the services of financial advisors during the bond issuance process. We investigate the benefits to issuers and market participants arising from the role of financial advisors in the issuance of municipal bonds. Using a large sample of 9,493 tax-exempt municipal bonds, we show that financial advisors have significant impact on borrowing costs, reoffering yields and underwriter gross spreads. Our results are more pronounced for revenue bonds, particularly for negotiated revenue issues. In addition, our results show significant advantages to using a financial advisor for refunding issues supporting the view that financial advisors play important roles for more complex issues. Our results are consistent with the interpretation that financial advisors provide important and useful services resulting in monitoring and information asymmetry reduction benefits accruing to issuers and market participants.      

Orderbook demand for corporate bonds

We examine the determinants of investor demand for corporate bond offerings using novel data on the primary market orderbook size. We find that credit risk and bond market presence are significant in explaining investor demand. These effects are more pronounced during the crisis periods including the global financial crisis and eurozone crisis as well as during the postcrisis periods. Our results also highlight the size of the bond investor order depends on information asymmetry costs and the benefit of diversifications, as investor demand is lower for new issuers as well as very frequent issuers. The levels of investor demand have important economic consequences for bond issuers as high investor demand shortens the time to subsequent bond issues and potentially reduces the firm's cost of capital at issuance.     

Municipal Disclosure Timeliness and the Cost of Debt

A longstanding concern for municipal bond investors is the lack of timely financial statement disclosures. Municipalities are held to lower disclosure standards than corporations. Using continuing disclosure dates for audited financial statements, we find bond issuers with slower disclosure have higher secondary market yields and spreads, less frequent secondary market trading, and are less likely to issue new bonds. We observe that future disclosure is largely predictable based on past disclosure and that disclosure often improves prior to new bond issuances. When municipalities do not capitalize on the benefits of timely disclosure, economic consequences are imposed on bondholders and taxpayers.     

Secondary Trading Costs in the Municipal Bond Market

Using new econometric methods, we separately estimate average transaction costs for over 167,000 bonds from a 1‐year sample of all U.S. municipal bond trades. Municipal bond transaction costs decrease with trade size and do not depend significantly on trade frequency. Also, municipal bond trades are substantially more expensive than similar‐sized equity trades. We attribute these results to the lack of bond market price transparency. Additional cross‐sectional analyses show that bond trading costs increase with credit risk, instrument complexity, time to maturity, and time since issuance. Investors, and perhaps ultimately issuers, might benefit if issuers issued simpler bonds.     

The role of ESG scoring and greenwashing risk in explaining the yields of green bonds: A conceptual framework and an econometric analysis

This article aims to investigate the factors that most influence the yields of public sector and corporate green bonds besides those conveyed by the conventional finance theory (e.g., rating, volatility, maturity). To accomplish that, we first develop a theoretical framework that postulates the negative relationship between the size of the underlying project financed by a green bond issuance, the use of the ESG metrics to quantify such impact, as well as the positive relationship between the risk of greenwashing practices by the issuer, and the yield to maturity of the green bond. We then provide an empirical validation of our conceptual framework by estimating multiple regression models applied to two distinct samples of public and corporate green bonds issued globally in the 2012–2020 period. The reliability of our results is confirmed by further exploring the effects of some key determinants on the yield spread of green versus comparable ordinary bonds of corporate issuers. Our findings corroborate our theoretical predictions showing that investors are inclined to accept lower returns in exchange for contributing to the funding of infrastructure projects with greater impact on the sustainability of target communities or territories and require higher premia as a form of compensation when being exposed to higher risk of greenwashing by issuers. At corporate level, greenwashing risk is higher among manufacturing (rather than services) firms but more pronounced in the financial sector. At public level, greenwashing strategies may be more easily pursued by multinational or sovereign issuers rather than local governments as the former's greater distance from communities enables them to elude investors' controls. Important recommendations are drawn for investors, rating agencies, and policymakers.     

Yankee Bonds and Cross-Border Private Placements

With credit spreads and U.S. Treasury yields near historical lows and the recent relaxation of U.S. regulatory reporting requirements, the U.S. bond markets are more and more frequently the markets of choice for international issuers. Total cross-border U.S. bond issuance is expected to top $200 billion in 1997, easily surpassing previous issuance levels.
Overseas issuers have three primary forms through which they can participate in the U.S. long-term debt markets: publicly traded, SEC registered bonds (commonly known as "Yankee" bonds); traditional private placements; and underwritten Rule 144A private placements. Each of these three financing methods has distinct benefits and limitations that should be thoroughly evaluated in light of the specific objectives of the issuer. Yankee bonds are typically the most cost-efficient vehicle for large, investment-grade issuers. The fastest growing segment is the rule 144A market, which accounted for 38% (by number, not dollar volume) of all U.S. cross-border debt transactions in 1996. The Rule 144A structure is often used for complex structures requiring heavy rating-agency involvement, such as future financial flow transactions and project financings. The 144A market has also become a particular favorite with international issuers because of its less formal disclosure requirements and streamlined execution process. The private placement market, which accounted for 24% of cross-border transactions in 1996, continues to be the dominant choice of smaller issuers, companies with complicated "stories," and firms that do not wish to submit to regular scrutiny by rating agencies. This article provides a detailed analysis of each type of bond issuance and the related issues facing a financial officer in trying to determine the most appropriate source of long-term debt.     

YANKEE BONDS AND CROSS-BORDER PRIVATE PLACEMENTS: AN UPDATE

With U.S. Treasury yields near historical lows and the recent relaxation of U.S. regulatory reporting requirements, the U.S. bond markets are more and more frequently the markets of choice for international issuers. Total crossborder U.S. bond issuance is expected to top $350 billion in 2000, easily surpassing previous issuance levels.
Overseas issuers have three primary forms through which they can participate in the U.S. long-term debt markets: publicly traded, SEC-registered bonds (commonly known as "Yankee" bonds); traditional private placements; and underwritten Rule 144A private placements. Each of these three financing methods has distinct benefits and limitations that should be thoroughly evaluated in light of the specific objectives of the issuer. Yankee bonds are typically the most cost efficient vehicle for large, investment grade issuers, and they are expected to account for over 75% of the $350 billion market in 2000. Second in importance is the rule 144A market, which is typically used for complex structures requiring heavy rating-agency involvement, such as future financial flow transactions and project financings. The 144A market has also become a particular favorite with international issuers because of its less formal disclosure requirements and streamlined execution process. The private placement market continues to be the dominant choice of smaller issuers, companies with complicated "stories," and firms that do not wish to submit to regular scrutiny by rating agencies. This article provides a detailed analysis of each type of bond issuance and the issues facing a financial officer in trying to determine the most appropriate source of long-term debt.     

Corporate Fraud and Corporate Bond Costs: Evidence from China

This study investigates the relationship between corporate fraud and four typical components of costs associated with corporate bonds. Based on data from a booming corporate bond market in China, we confirm that fraudulent issuers have higher corporate bond costs. Specifically, they are more likely to push upward price revisions, pay higher issue fees and coupon spreads, and encounter larger underpricing after issuance. Moreover, we demonstrate that severe corporate fraud is also significantly related to the costs of corporate bonds. Furthermore, we find that investors pay more attention to fraud in accounting information and disclosure. These results remain robust to a strand of endogeneity and through the robustness tests. In additional research, we find that bonds issued by fraudulent firms tend to receive lower ratings and show inferior performance after issuance. We also demonstrate that the effects of corporate fraud on bond costs erode as time passes, although the mitigation speed is slow. Finally, we find that hiring reputable financial intermediaries can partially mitigate the negative effects of corporate fraud.     

The effect of issuance documentation disclosure and readability on liquidity: Evidence from green bonds

This paper investigates the potential effects of the disclosure and the readability of a green bond’s issuance documentation on its liquidity. Using a sample of 274 green bonds issued by both corporate and financial issuers (102 unique firms) worldwide (23 countries) from 2011 to 2018, we show that both the disclosure of green bond frameworks and annual reports and their readability increase the bond’s liquidity. Our results are robust to checks for endogeneity and to alternative estimation techniques. Both disclosure and readability have a more important impact on liquidity for bonds issued by nonfinancial (vs. financial) issuers, bonds with longer maturities, and those with lower credit ratings.     

Green bond vs conventional bond: Outline the rationale behind issuance choices in China

Increasingly serious ecological problems have generated considerable focus on environmental-friendly green bonds. Although it has been experiencing rapid development, the rationales behind its issuance remained largely unexplored. This paper makes an initial discussion based on China. We analyze the roles of potential factors that might affect issuers to choose between green or conventional bonds, as well as identify the confrontational combinations of the statistically significant determinants. A sample of green and matching conventional corporate bond issuance records since 2016 is studied through the binary choice regressions (Probit and Logit) and fuzzy set qualitative comparative analysis (fs-QCA). The results demonstrate different motives and premises drive firms to choose green or conventional bonds when using debt financing. This choice can be eventually attributed to the financing demand and the preference of issuers. The factors related to bonds' specific characteristics, issuers' financial features, and external ambience conditions might play significant roles in this decision process. Additionally, we summarized three causal paths affecting the green bond issuance choice. Overall, this paper provides a knowledge basis for targeted encouraging green bond issuance, some corresponding implications are also concluded.     

Do Investor Demand and Market Timing Affect Convertible Debt Issuance Decisions by REITs?

The unique regulatory environment of REITs casts doubt on the traditional theoretical process by which REIT managers base their convertible debt issuance decisions on issuer condition and prospects. Anecdotal evidence shows that REITs may have catered to demand by investors, including a demand by convertible bond arbitrageurs when issuing convertible debt. This study examines the rationale behind convertible debt issuances by REITs, focusing on the possible impacts of investor demand and market timing. The results suggest that investor demand significantly affects convertible debt issuance decisions by REITs while certain unknown factors appear to have contributed to the sudden increase of convertible debt offerings in 2006 and 2007. REITs also time the market to conditions in the public debt market. The results only partially support the offered risk-shifting, risk-uncertainty, backdoor-equity, and sequential-financing hypotheses.     

State ownership and the cost of debt: Evidence from corporate bond issuances in China

Corporate credit risk can be reduced through implicit government guarantees. State-owned enterprises (SOEs) in China provide a distinctive setting to investigate government roles in corporate debt financing. We find that non-SOEs’ corporate bond issuance costs are significantly higher than those of SOEs. We also observe relatively lower bond issuance costs for firms controlled by the central government (CSOEs) than those controlled by local governments (LSOEs). In addition, we demonstrate that compared with SOEs, non-SOEs’ financial constraints are mitigated to a larger extent after the bond issuances. Overall, we show that state ownership plays an important role in determining corporate bond issuance costs.     

The Effect of Credit Ratings on Disclosure: Evidence from the Recalibration of Moody's Municipal Ratings

This paper examines how credit rating levels affect municipal debt issuers’ disclosure decisions. Using exogenous upgrades in credit rating levels caused by the recalibration of Moody's municipal ratings scale in 2010, we find that upgraded municipalities significantly reduce their disclosure of required continuing financial information, relative to unaffected municipalities. Consistent with a reduction in debtholders’ demand for information driving these results, the reduction in disclosure is greater when municipal bonds are held by investors who relied more on disclosure ex ante. However, we also find that the reduction in disclosure does not manifest when issuers are monitored by underwriters with greater issuer-specific expertise and when issuers are subject to direct regulatory enforcement through the receipt of federal funding. Overall, our results suggest that higher credit rating levels lower investor demand for disclosure in the municipal market, and highlight the role of underwriters and direct regulatory enforcement in maintaining disclosure levels when investor demand is low.     

EXPRESS LANE OR TOLLBOOTH IN THE DESERT? THE SEC'S FRAMEWORK FOR SECURITY ISSUANCE

U.S. companies that need capital may choose between selling securities in the private and public markets. These venues differ in terms of direct issuance costs, the required information disclosed, the liability incurred, and the mechanics of the capital-raising process itself. During the last two decades, the Securities and Exchange Commission (SEC) has deregulated private offerings by broadening their investor base and increasing secondary market liquidity. At the same time, SEC policy has bifurcated the offering process in the public market into two distinct segments based largely on company size and seasoning. Large public issuers have seen a gradual deregulation and acceleration of their capitalraising processes. Important changes for issuers include allowing them to incorporate information into registration statements by reference to Exchange Act reports, to use shelf registration to speed up offers, and to place securities offshore with less regulatory uncertainty. Though small issuers enjoy some of the benefits of these changes, deregulation of their offerings has been somewhat less pronounced. In a Commission report and a subsequent concept release, the SEC indicates it may restructure and unify these three disparate strands of capital raising through an innovative schema of registering companies rather than securities.     

Signaling effect of cash holdings adjustment before bond issuance

Using Fixed Income Securities Database bond issuance data, we examine how firms' cash holding adjustment exhibits a signaling effect prior to corporate bond issuance; we also examine the meaning of this effect on firms' capital policy. Analyzing a sample of U.S. bonds from 1981 to 2018, the results found that bond issuers adjust their cash holdings higher prior to bond issuance compared to non-issuer firms. After controlling for various firm and bond characteristics, we found that firms that adjust their cash holdings higher attract investors' attention, thus resulting in lower bond spreads. Our results also perform different patterns in subsamples when adopting accrued and real earnings management, financial constraints, and corporate opacity.     

Market Segmentation and the Cost of Capital in a Domestic Market: Evidence from Municipal Bonds

We study the implications of market segmentation in a domestic setting, the US municipal bond market. A (state‐level) segmentation of this market emerges from asymmetric tax exemption. Municipal bond investors are exempt from state and local taxes on bonds issued by their own state, but not on bonds issued by other states. We demonstrate that market segmentation imposes significant costs on both issuers and investors in the form of higher yields and higher costs of financial intermediation. Our results provide insight into some well‐documented artifacts of the municipal bond market, such as high yields and the popularity of insurance.     

我国企业债券违约的特征趋势、融资特点及风险处置机制研究

本文从债券违约的数量规模、行业分布、地域分布、企业属性、债券品种及违约率等方面阐述了我国企业债券违约的特征趋势,分析了我国企业债券违约的主要原因及其所呈现出来的融资特点,探讨了我国企业债券违约后的五种处置方式,认为我国债券违约风险处置机制还不完善,缺少独立法律制度、处置的市场化程度较低、投资者保护机制不健全、对发行人缺乏硬性约束,影响了违约债券的整体兑付水平,投资人利益难以得到有效维护。建议采取多种措施降低债券违约发生率、优化发行人融资结构、建立债券违约的市场化处置机制,以降低债券违约风险,推动债券市场健康发展。     

Debt Issuance in the Face of Tax Loss Carryforwards

We examine the market impact of issuances of public and private debt by firms with sizeable tax loss carryforwards (TLCFs). Public issuances are met with a significantly negative stock price reaction, while private placements are associated with a positive marginally significant stock price reaction. After controlling for asymmetric information proxies, the stock price reaction to the debt issuance is more negative, the larger the TLCF. The evidence suggests that debt financing is suboptimal when issuers have large TLCFs, which in turn, supports the relevance of taxes for debt usage.     

Callable Bonds: Better Value Than Advertised?

Callable bonds allow issuers to manage interest rate risk in the sense that if rates decline, the bonds can be redeemed and replaced with lower‐cost debt. Investors demand a coupon premium for giving issuers this option; and when deciding whether to issue callable or noncall‐able bonds, the issuing companies must determine whether it's worth paying the coupon premium. This article addresses two main questions about the structuring and refunding of callable bonds. The first concerns the value of the call option: At the time of issuance, does it make sense to accept the coupon premium for the option being acquired? The second concerns the optimal timing of a refunding: At refunding, do the cash flow savings provide adequate compensation for the option that is being exercised and hence given up? In perfect markets with no taxes or transactions costs, the average corporate issuer should be indifferent between issuing callable bonds or their noncallable equivalent. But corporate taxes, together with risk management considerations, can lead some issuers to prefer callable bonds, possibly with coupons that otherwise would be unacceptably high. Refunding decisions should be made using the concept of “call efficiency,” which compares the savings (net of transactions costs) from calling to the loss of option value. The latter should also account for any option that is built into the replacement issue. Transaction costs that occur when refunding diminish the value of the call option, and their effect should be factored in at the time of issuance. One way of avoiding such costs is to issue “ratchet” bonds—essentially one‐way floaters that automatically reset lower when rates decline, thus delivering the benefits of callable bonds while eliminating transaction costs.