Market Reactions to Green Bond Issuance Announcements: The Role of Regulative and Normative Institutions

Abstract: This study uses an event- and panel analysis methodology to investigate whether the stringency of regulative and normative institutions is associated with a positive stock market reaction to green bond issuance announcements. Environmentally related tax revenue is used to represent regulative institutions and environmental awareness is used to represent normative institutions. We compile a comprehensive sample of 144 unique firms and the corresponding first time green bond issuance announcement. We find that the influence of normative institutions on the stock market reaction is positive and significant and that the relation seems to be driven by countries with relatively stringent normative institutions. We do not find similar evidence for regulative institutions. Institutional ownership and institutional supportiveness are discussed as possible explanations for our findings. The study contributes to the international business literature because of the emphasis on how differences in institutions affect firm performance which has implications for firms’ financing decisions and environmental activities. It also adds to the growing literature on green bonds and sustainable investments.