ESG Ratings and Underpricing on Emerging Markets: Case of European IPOs between 2014 and 2023

Purpose: Given the increasing salience of Environmental, Social, and Governance (ESG) criteria in investment decisions, this study investigates the extent to which pre-Initial Public Offering (IPO) ESG ratings function as a mechanism to reduce information asymmetry and, consequently, influence the phenomenon of IPO underpricing. The analysis is focused on a sample of IPOs within developed and emerging European markets. Design/methodology/approach: An Ordinary Least Squares (OLS) regression analysis is employed to empirically examine the relationship between the RepRisk rating (as a proxy for corporate sustainability performance) and the Initial Return (IR) as the measure for underpricing. The sample comprises 1,927 European IPOs executed between 2014 and 2023. Model robustness is ensured through the inclusion of control variables covering firm, offer, and market characteristics. Findings: The results demonstrate a conditional influence of the ESG rating on underpricing. For the overall sample, no significant effect of the RepRisk rating on underpricing was identified. However, a sub-analysis of rated companies during the period prior to the COVID-19 pandemic (2014-2019) revealed a statistically significant negative relationship between the ESG rating and underpricing. This finding supports the hypothesis that higher ESG transparency mitigates information asymmetry. Conversely, for IPOs originating from European emerging markets, no significant influence of the ESG rating could be established. Research limitations/implications: The findings suggest that the role of ESG ratings in alleviating IPO underpricing is highly dependent on the observation period and the specific submarket. The assumption that ESG activities universally contribute to greater market certainty during times of crisis could not be confirmed. Future research should address the heterogeneity of European regulatory frameworks and incorporate ratings from multiple agencies to enhance the generalizability of these conclusions Originality/value: This study makes a novel contribution to the literature by explicitly linking pre-IPO Environmental, Social, and Governance (ESG) ratings to the underpricing of Initial Public Offerings (IPOs) in both developed and emerging European markets. While prior research has examined the role of ESG in post-IPO performance and firm valuation, few studies have investigated its function as a signal to mitigate information asymmetry during the IPO process. By employing RepRisk ratings as a proxy for corporate sustainability performance, this research provides a unique empirical examination of how ESG considerations can influence initial investor perceptions and pricing outcomes. The study’s value lies in its dual contribution to theory and practice. Theoretically, it extends the signaling and information asymmetry frameworks by incorporating ESG metrics as a credible pre-IPO signal to investors. Practically, the findings offer actionable insights for issuers, underwriters, and policymakers on how sustainability practices and ESG disclosure can shape investor behavior and potentially reduce the cost of capital associated with IPOs. Additionally, the inclusion of both developed and emerging European markets provides a comparative perspective, enhancing the generalizability of the results and highlighting market-specific dynamics in ESG signaling and IPO underpricing.