Sustainability Signals and Market Reactions: ESG and IPO Underpricing Across Legal Jurisdictions

Abstract

The relationship between Environmental, Social and Governance (ESG) commitments and IPO underpricing across legal jurisdictions was investigated. Using a cross-sectional dataset of 692 IPOs between 2015 and 2025, the study examined whether firms with stronger ESG profiles experienced lower underpricing and whether this effect varied between Common Law and Civil Law countries. Based in theories of asymmetric information and signaling, the analysis employed multiple OLS regression models with robustness checks for multicollinearity and nonlinearity. The findings showed a statistically significant inverted U-shaped relationship between ESG scores and IPO underpricing. This might imply that while low ESG engagement may coincide with higher underpricing, firms with high ESG commitments were associated with reduced first-day returns. The effect of legal jurisdiction was significant, with common law systems associated with higher levels of underpricing. Furthermore, the interaction terms with ESG and Legal jurisdiction provided additional support for the inverted U-shaped relationship. The results contribute to the literature on sustainable finance and market signaling, offering new insights for policymakers, issuers and investors regarding the valuation of ESG commitments in global capital markets.