Deciphering Greenium: The Role of Investor Demand

Using security-level bookbuilding data, we examine the pricing dynamics and demand of green bond offerings (GBOs) relative to their conventional counterparts. We show that greenium arises from ESG-focused investors’ almost exclusive demand for GBOs. GBOs typically receive significantly larger order books, allowing underwriters to compress offering spreads more for GBOs than for comparable conventional offerings. Even at the same level of investor demand, underwriters tighten spreads more for GBOs, suggesting that ESG-focused investors exhibit lower price sensitivity. These results remain robust when we proxy for ESG-focused investor demand in the primary market using their holdings of similar bonds in the secondary market. Further analyses rule out the temporary price pressure or liquidity preference explanations. Our study provides direct evidence to support investor-tastes models. This paper was accepted by Prof. Bo Becker, finance. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2024.05106 .