What is it about?

This study examines whether information about a firm's engagement in environmental, social, and governance (ESG) practices is material to IPO market participants.

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Why is it important?

This study documents that firms for which there is available ESG performance information prior to going public exhibit higher underpricing due to a positive market response. Such a reaction is validated by agency cost-reducing practices that ESG-rated firms follow prior to the IPO, the superior post-IPO market performance they exhibit in terms of equity financing, and the higher share of financially sophisticated investors they attract compared to their ESG-unrated peers. Overall, our results highlight that it pays off to do good and to have the right investors; however, firms’ good ESG practices need to be visible to the market, through rating practices, to reap the benefits.

Perspectives

This study uncovers a noteworthy trend: companies that have publicly available Environmental, Social, and Governance (ESG) performance data before their initial public offering (IPO) tend to experience higher underpricing due to a positive market response. This positive reaction is supported by the adoption of measures by ESG-rated firms aimed at reducing agency costs before the IPO. Additionally, these firms demonstrate stronger post-IPO market performance in terms of equity financing and attract a larger proportion of financially savvy investors compared to their counterparts without ESG ratings. Overall, these findings emphasize the value of ethical business practices and the presence of the right investors. However, they also stress the importance of making a company's good ESG practices visible to the market, typically through rating systems, to fully capitalize on these advantages.

Dr. Dimitrios Konstantios
Alba Graduate Business School, The American College of Greece

Read the Original

This page is a summary of: Is sustainability rating material to the market?, Financial Management, August 2022, Wiley,
DOI: 10.1111/fima.12406.
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