Evaluating the Influence of ESG Pillars on Seasoned Equity Offerings

Abstract

This paper examines whether the environmental, social, and governance (ESG) performance mitigates the underpricing of seasoned equity offerings and lessens investors' adverse reactions to seasoned equity offerings (SEOs). Using a dataset of 5218 SEOs issued by 2230 U.S. firms during the 2005 to 2021 period, the paper investigates how each ESG pillar impacts the market reaction to SEO announcements and SEO underpricing. This paper suggests that better environmental, social, and governance performance conveys positive information about the firm’s ESG practices, attracting socially responsible investors. Overall, the paper finds evidence that ESG performance reduces the adverse market reaction to SEO announcements and lowers the cost of raising equity by decreasing the magnitude of SEO underpricing. Each of the three ESG pillars significantly impacts SEO underpricing. However, the paper finds no significant evidence that the environmental pillar impacts investors’ reactions to SEO announcements.