Unveiling the green advantage

: post-IPO investment performance of ESG companies: a perspective of venture capital-backed firms in the U.S. market

Abstract

This study investigates the investment potential of firms with Environmental, Social, and Governance (ESG) agendas, particularly those backed by Venture Capitalists (VC), post-initial public offering (IPO). Since the creation of ESG practices in 2006, financial institutions increasingly integrate this criteria into investment decisions. Hence, based on post-IPO data in the U.S. market, we evaluate whether public firms exhibit additional premiums, addressing questions about stock performance, and holding time frames.. We assess our findings using Buy and Hold Abnormal Returns as well as Carhart Four-Factor Model. Our analysis reveals a consistent outperformance of ESG firms since 2006, with average annual excess returns of 6.16%. Notably, ESG firms backed by VC exhibit even stronger performance, with annual average excess returns of 9.22% since 2009, but only when markets perform positively. Additionally, we find a consistent difference of positive returns if investments are held more than 12 months after their IPO for both ESG samples, registering after 60 months of holding period, the difference in absolute returns of 55,7% for the ESG portfolio and 32,8% for the ESG VC sample. However, the presence of venture capital alone does not consistently translate into a post-IPO price premium, suggesting investor indifference to this factor isolated. The findings contribute to a better understanding of the growing environment of ESG investments as it keeps attracting capital in both private and public markets, and the role of Venture Capital in building post-IPO stock performance to ensure long-term financial returns.

Date of Award	22 Jan 2024
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Fátima Shuwaikh (Supervisor)