How does stock market react to the announcement of green bond issue? Evidence from Nordic countries

Abstract

Green bond issue is a signal to a stock market that is interpreted by shareholders differently: as positive for eco-friendly investors and as negative for traditional investors. The study aims to assess the short-term stock market reaction to the announcement of green bond issues in Nordic public companies and to determine whether the characteristics of green bond issues and issuers are significant determinants of stock cumulative abnormal return (CAR). Total sample is 197 green bond issues during 2017–2024. Sweden has the highest number of green bond issues (60.9%). Denmark and Finland have a very similar share of 20.3% and 18.8% respectively. Stock market reaction is assessed by applying an event study methodology. CAR dependence on characteristics of green bond issues and issuers is determined using a heteroskedasticity-corrected regression model. The study revealed a negative stock market reaction to the announcement of green bond issues. Such reaction may not only be due to increased capital expenditures and financial risk, but also to the shift of investments from stocks to green bonds as the majority of green bond were issued during the COVID-19 pandemic and the Russian-Ukrainian war. Maturity, coupon rate, cancellation right, and issue amount are statistically significant determinants of CAR only for the companies operating in the industrial, utility, and telecommunication sectors and only in the shortest event window. Coupon rate and cancellation right are statistically significant in the longest event window. Issue amount is statistically significant in the longest event window, coupon rate and cancellation right – in the shortest and medium event windows analysing the CAR in banks and financial institutions. We also found different issuers’ characteristics as determinants of CAR in these two categories of companies. The findings support short-term investors’ behavior based on the signaling theory.