Mandatory ESG Disclosure, Information Asymmetry, and Litigation Risk: Evidence from Initial Public Offerings

Abstract

I use the staggered adoption of mandatory ESG disclosure regulations around the world to explore the impact of ESG disclosure on initial public offering (IPO) underpricing. Studying over 15,000 IPOs issued in three dozen countries over two decades, I find robust evidence that underpricing is substantially lower in countries with an ESG disclosure mandate. High-quality disclosure environments moderate and tougher IPO liability standards amplify the negative association between ESG disclosure mandates and underpricing, which suggests that ESG disclosure mandates reduce information asymmetry and litigation risk for IPO issuers. The effect of ESG disclosure mandates on underpricing is stronger in countries with greater environmental, social, and governance concerns and following events that substantially increase investor attention to ESG issues.