IPO Underpricing and ESG firms: An empirical study

Abstract

Firm decision-making in the context of Initial Public Offerings is centered around the problem of information asymmetry, and the resulting differences in valuations between new issue participants. We aim to study the ‘unexplained’ component of IPO underpricing equations that underlie such a notion, where ESG disclosures can reduce uncertainty in terms of market expectations. We classify firms based on the level of ESG inherent in the organization, and test whether these levels are weighed in the offer price decision and subsequent first-day returns. Controlling for firm-level factors, we find that although general ESG efforts marginally improve underpricing predictions, there exists no significant variation between these values for different classes of ESG firms.