Climate change is accelerating. Since recordkeeping began in 1880, the six warmest years on record for the planet have all occurred since 2010. One estimate suggests that keeping the world below the 2-degree Celsius scenario, a threshold viewed as limiting the likelihood of devastating consequences, will require $12 trillion over the next 25 years.

In the absence of a global carbon pricing scheme, bond markets will be central to financing these interventions. In this paper, we study the U.S. market for “green bonds,” which we and others define as bonds whose proceeds are used for an environmentally friendly purpose. Examples include renewable energy, clean transportation, sustainable agriculture and forestry, energy efficiency, and biodiversity conservation. Since the first green bond was issued in 2007 by the European Investment Bank (EIB), the market has expanded to include a variety of issuers, including supranationals, sovereigns, corporations, and U.S. and international municipalities. It is a small but increasingly well-defined area of the fixed income markets. Yet in spite of the general acceptance of the notion of a “green” bond, there is not yet a single universally-recognized system for determining the green status of a bond. Green bonds may be labeled and promoted as such by the issuer, such as the 2007 EIB issue; formally certified by a third party according to a set of guidelines; or, labeled green by a data provider, for example Bloomberg. We review the origins of the market and standards for identifying green bonds in the next section.

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In our paper, Dividends as Reference Points: A Behavioral Signaling Model, which is forthcoming in the Review of Financial Studies, we use loss aversion, a feature of the prospect theory value function of Kahneman and Tversky (1979), to motivate a behavioral signaling model. A loss-averse value function has a kink at the reference point whereby marginal utility is discontinuously higher in the domain of losses. Loss aversion is supported by a considerable literature in psychology, finance and economics, as we briefly review later.

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In our recently updated working paper A Reference Point Theory of Mergers and Acquisitions, we propose a “reference point” view of mergers which holds that salient but largely irrelevant reference point stock prices of the target help to explain several aspects of mergers and acquisitions, involving both the pricing and the types and quantities of firms traded.

The standard textbook story on mergers emphasizes synergies. The offer price starts with an estimate of the increased value of the combined entity under the new corporate structure, deriving from a variety of cost reductions. This value gain is then divided between the two entities’ shareholders according to their relative bargaining power. In theory, all of this leads to an objective and specific price for the target’s shares. In practice, however, valuing a company is subjective. A large number of assumptions are needed to justify any particular valuation of the combination. In addition, relative bargaining power may not be fully established. These real-life considerations mean the appropriate target price cannot be set with precision, but established only to be within a broad range. We hypothesize that this indeterminacy, in turn, creates space for the price offered and its reception to reflect other influences, in particular the psychological influences on the board of the target and the bidder and target shareholders, who ultimately must approve the price.

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