Is Sustainability Rating Material to the Market?

Financial Management

80 Pages Posted: 18 Nov 2021 Last revised: 10 Jul 2022

See all articles by Claire Economidou

Claire Economidou

Utrecht University - School of Economics

Dimitrios Gounopoulos

University of Bath - School of Management

Dimitrios Konstantios

University of Piraeus

Emmanuel D. Tsiritakis

University of Piraeus

Date Written: July 8, 2022

Abstract

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

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

Claire Economidou

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands

Dimitrios Gounopoulos (Contact Author)

University of Bath - School of Management ( email )

Dimitrios Konstantios

University of Piraeus ( email )

Karaoli and Dimitriou 80
80 KARAOLI & DIMITRIOU STREET
Piraeus, Attiki 18534
Greece

Emmanuel D. Tsiritakis

University of Piraeus ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece
00302104142187 (Phone)

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