This study examines how green bond financing costs in China are jointly shaped by market pricing mechanisms and institutional investor behavior. It develops an integrated two-level framework linking issuance-level bond characteristics with investor decision-making to explain green bond pricing in an emerging market. Using a comprehensive dataset of Chinese green bond issuances, the results show that financing costs are driven mainly by conventional credit-related signals, including issuer and bond ratings, guarantee structures, issuance size, and maturity. However, market frictions such as liquidity constraints and rating inertia weaken the capitalization of environmental attributes in yields. A survey-based Logit analysis of institutional investors in Shanghai further shows that green bond investment is influenced more by trading activity, information transparency, and risk management than by environmental awareness alone. Institutional heterogeneity also suggests that securities firms display stronger participation than investment companies, reflecting differences in bond-market exposure, product familiarity, and institutional investment mandates. Overall, the findings reveal a feedback mechanism in which market signals shape investor behavior, which in turn reinforces or moderates pricing dynamics. The study clarifies the structural and behavioral drivers of green bond pricing and offers policy implications for improving transparency, liquidity, and investor incentives.
Deng et al. (Fri,) studied this question.