Sustainability and Shareholder Value: Exploring ESG Scores and IPO Companies’ Share Performance

Abstract

In an initial public offering, a private company is listed on the stock exchange and its shares are publicly traded for the first time. The announcements and implementation of the initial public offerings often attract media attention. Moreover, there are widely known phenomena associated with the market performance of the shares of IPO companies. Socially responsible investing means the investors’ effort to consider responsible aspects while making investment decisions. Corporate social responsibility, in turn, describes the company's need to consider social, environmental, governance, and ethical aspects for its business to be responsible. Responsible investing and corporate social responsibility are key phenomena of the 21st century as the money invested based on sustainable aspects amounted to nearly seventeen trillion dollars in the year 2020. In addition, there are numerous studies on the impact of corporate social responsibility on the company's financial and market performance. The study aims to examine the informativeness and practicality of the ESG scores provided by a rating agency for investing in newly public companies. This is done by comparing the so-called wealth relatives of the top 10% ESG score IPO companies to the wealth relatives of the bottom 10% ESG score IPO companies. In addition, this study investigates the possible positive effect of ESG ratings on wealth relatives of IPO companies. The data consists of 201 IPO companies that have gone public between 2010 and 2018 and that have Refinitiv (Thomson Reuters) Eikon's ESG scores for 3 years after the initial public offering. The empirical results indicate that the first year and three yearly wealth relatives of top 10% ESG score IPO companies are significantly higher than those of bottom 10% ESG score IPO companies. However, the study does not find a relationship between first-year wealth relatives and ESG scores of IPO companies nor between the first three annual wealth relatives and ESG scores of companies. Therefore, the findings suggest that in the creation of shareholder value, ESG scores mainly affect the market-adjusted returns of extremes of the rating scale.