Liquidity and clientele effects in green debt markets

Dion Bongaerts and Dirk Schoenmaker

Journal of Corporate Finance, 2024, vol. 86, issue C

Abstract: We jointly model green and regular bond markets. Green bonds can improve allocative efficiency and lower financing costs for green projects, but economies of scale, like liquidity fragmentation, may cause friction. Consequently, profitable and welfare-enhancing projects, green and brown, can be rationed in equilibrium. Rationing green projects happens with a shortage of climate investors, large non-monetary offsets, and/or costly fragmentation. Rationing regular projects can happen with a shortage of regular investors, but also with an abundance, when more profitable green projects crowd out regular ones. We propose an alternative security design that preserves green earmarking but prevents fragmentation.

Keywords: Environmental finance; ESG; Liquidity; Bond markets; Market segmentation; Security design; Price discrimination (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G32 Q50 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:86:y:2024:i:c:s0929119924000440

DOI: 10.1016/j.jcorpfin.2024.102582

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