Is sustainability rating material to the market?

Claire Economidou · Dimitrios Gounopoulos · Dimitrios Konstantios · Emmanuel D. Tsiritakis

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Corporate Social Responsibility Reporting Corporate Finance and Governance Sustainable Finance and Green Bonds

Abstract

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 1856 initial public offerings (IPOs) by U.S. 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.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1984Corporate financing and investment decisions when firms have information that investors do not have 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1997A Survey of Corporate Governance 1996Agency costs of free cash flow, corporate finance, and takeovers 2010Voluntary Nonfinancial Disclosure and the Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting 2014The Impact of Corporate Sustainability on Organizational Processes and Performance 2017Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis

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