How Can ESG Ratings Affect an IPO Stock Valuation?
- By Sam van de Schootbrugge
- 4 min read
A firm’s environmental, social, and governance (ESG) profile appears increasingly linked to financial outcomes. Investors are therefore considering ESG factors alongside more traditional financial variables when making investment decisions. This includes initial public offering (IPO) listings, where information disparities often result in significant mispricing. A new Journal of Corporate Finance paper examines whether country-level ESG ratings can affect IPO valuations. They find:
Firms undergoing IPO conform to the ESG norms of their listed country, and higher MSCI ESG Government Ratings reduce IPO underpricing.
A one standard deviation improvement in a country’s ESG Government Rating is associated with a 7.07ppt decrease in first-day returns for IPOs that occur in that country.
Underpricing tends to be lower in countries with stronger environmental risk management practices, e.g., countries with better water and/or energy resource management.
Lastly, the negative relation between ESG ratings and underpricing is stronger in countries with higher liability standards and stronger shareholder protections.
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.