Mayer Brown Free Writings + Perspectives

[author: Nicole Veru]

Alessandro Fenili and Carlo Raimondo, in their study and paper ESG and the Pricing of IPOs: Does Sustainability Matter, find a significant relationship between a discussion of ESG related issues and IPO pricing. They performed textual analyses of 783 US IPOs completed during the period from 2012 through 2019 across various industries. Given investor interest in sustainability and ESG in their investment decisions, the study focuses on the amount of information about sustainability disclosed by IPO issuers. In order to assess IPO disclosures, the study considered a list of words that were associated with ESG topics. Then, they performed textual and other analyses on the IPO prospectuses. A large increase in the number of ESG “words” in the IPO prospectuses was found to lead to reduced information asymmetry (investors have better information on which to base their investment decision regarding the IPO issuer’s ESG focus) and to less IPO underpricing. Over the years studied, the study observed an increase in the mean number of words included in IPO prospectuses and also in the mean number of ESG words included in IPO prospectuses. So, IPO prospectuses are getting longer, and ESG related disclosures are getting more detailed. Disclosing ESG information leads to better firm evaluation.

In addition, in order of magnitude for price revision, ESG, Environmental, Governance, and Social variables had respective decreases of .194, .183, .182, and .130 standard deviations. Thus, demonstrating that ESG as a whole has the highest economic effect on underpricing and price revision. The authors checked their results through robustness checks; they controlled different variables and data items and overall the results did not significantly change. Ultimately, the paper offers evidence of a strong association between ESG disclosure during an IPO and less IPO underpricing and more accurate evaluation by investors of the IPO issuer’s valuation. The paper is available here.

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