Corporate greenness and bond yield spreads

We examine the cross-sectional relationship between corporate greenness and bond spreads using a comprehensive dataset of U.S. corporate bonds over the period 2008–2021. Portfolio sorts based on firms’ environmental scores (ENV), our proxy for corporate greenness, reveal a negative relationship between ENV and bond spreads, which persists after controlling for an extensive set of firm and bond characteristics in Fama–MacBeth and panel regressions. Our results are robust to propensity score matching, which accounts for selection on observable characteristics, and to a two-step orthogonalization procedure, which isolates the component of ENV orthogonal to these characteristics. Finally, we find strong evidence for cash flow uncertainty and downside risk as potential economic channels underlying the ENV-spread relationship, consistent with a pecuniary interpretation. The persistence of this relationship beyond observable financial characteristics is also consistent with a potential role for non-pecuniary investor preferences.