Does Sustainable Investing Matter to the Market?

Abstract

This study examines whether information about a firm’s engagement in environmental social and governance (ESG) responsible practices is material to market participants. Evidence from a sample of 1,856 IPOs by US companies for the period 2007-2018 robustly documents that firms for which there is available ESG performance information prior to going public exhibit higher underpricing due to positive market response. Such 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 high er 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 rip off the benefits.

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

JEL Classification: G10; G12; G14; G30