Green bond pricing and greenwashing under asymmetric information

Abstract

green bond pricing and greenwashing under asymmetric information yun gao and jochen m. schmittmann wp/22/246 imf working papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. the views expressed in imf working papers are those of the author(s) and do not necessarily represent the views of the imf, its executive board, or imf management. dec © 2022 international monetary fund wp/22/246 imf working paper asia and pacific department green bond pricing and greenwashing under asymmetric information prepared by yun gao and jochen m. schmittmann* authorized for distribution by chikahisa sumi december 2022 imf working papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. the views expressed in imf working papers are those of the author(s) and do not necessarily represent the views of the imf, its executive board, or imf management. abstract: we analyze the corporate green bond market under a rational framework without an innate green preference, using a simple adverse selection model. firms can use green bonds to signal their green credentials to investors. transition risk stems from uncertainty over the introduction of carbon pricing. we show that green bonds have a price premium over conventional bonds when there are information asymmetry, transition risk, and it is costly to engage in greenwashing, that is, false or exaggerated claims of being green. the …

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