This paper studies whether green bonds mitigate information asymmetries about issuers’ exposure to climate risks through a signalling mechanism. Green bonds are debt instruments in which issuers commit to investing proceeds in sustainable projects. Using a novel identification strategy that controls for standard effects of debt announcements, this paper shows that green bond announcements result higher equity valuations and lower yields on extant bonds, particularly at longer maturities. Issuers also become less sensitive to climate change concerns. The results suggest that markets view green bonds as credible signals of commitment and reduced climate risk exposure.
