Swedish green bond market: do firms benefit from green bonds through a lower cost of capital?

Abstract: Green bonds are one of the most important assets in sustainable finance that are projected to reach a market size of USD 1 trillion by the end of 2022. This thesis looks into the Swedish corporate bond market from 2014 to March 2022 with the goal of understanding if firms benefit from a lower cost of capital through the issuance of green bonds. Specifically, we examine whether investors accept lower returns from green bonds compared to conventional bonds ("green premium") and whether there is a positive stock price reaction following green bond issuance. We found that companies issuing green bonds have a big pricing benefit of 33.0 - 44.4 basis points compared to firms that issue conventional bonds. Although the result becomes insignificant after comparing yield spread within firms, there are not enough sample to dismiss the existence of green premium. From a cost of equity perspective, we do not find evidence of a significant positive stock price reaction upon the green bond issuance event. However, we found that investors actively seek information regarding green bonds issuance, as shown by the increase in GSVI.