2022 Research Seminar Series
Monday, February 14, 2022

The KBS Spring Series begins Tuesday 15th February  (1-2pm) with a seminar by Darren Shannon.  The seminar will be on MS Teams: Click here to join the meeting. All Welcome.

How do Equity Investors React to Green Bond Announcements? A Deep Learning Application to Abnormal Returns

Investors have developed a strong appetite for investments in environmental sustainability, and publicly traded firms have been happy to oblige. ‘Green Bonds’ have emerged as a popular fixed income solution to fulfil green investing demands, where the proceeds from the bond are used to fund climate-related or environmental initiatives. Since the first release of a ‘Green Bond’ by a publicly traded firm in 2013, issuance volumes have amassed $611bn, with $230bn of Green Bonds being issued by publicly traded firms in 2021 alone.  Studies have highlighted that announcements of upcoming green bond issuances have produced abnormal returns for the issuing firms, or returns in excess of the underlying index. However, relatively little is known about the mechanics of equity market reactions to the announcements of Green Bonds. Understanding equity market reactions can explain how investors perceive these bonds. This study investigates the sentiment of equity markets toward Green Bond issuers by exploring the predictability of market-beating returns using Artificial Neural Networks. I gather bond, accounting, and ESG data relating to all 1,760 publicly traded firms who have announced Green Bonds over the course of 2013-2021, and perform an event study on the predictability of abnormal returns over a 2-day window. I find that trading on the basis of a subset of financial strength and ESG indicators produced significant returns in out of sample testing, with bond characteristics playing a minimal role in predicting excess returns.