Is Sustainability Rating Material to the Market?

This study examines whether information about a firm’s engagement in environmental, social and governance (ESG) practices is material to market participants. Evidence from a sample of 1,856 IPOs by US companies for the 2007-2018 period robustly 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.

Keywords: Sustainability; Environmental Social Governance (ESG), Initial Public Offering (IPO), Market Performance; Firms Valuation

JEL Classification: G10; G12; G14; G30

Suggested Citation: Suggested Citation

Economidou, Claire and Gounopoulos, Dimitrios and Konstantios, Dimitrios and Tsiritakis, Emmanuel D., Is Sustainability Rating Material to the Market? (July 8, 2022). Financial Management, Available at SSRN: https://ssrn.com/abstract=3965134 or http://dx.doi.org/10.2139/ssrn.3965134