Aftermarket performance of green IPOs and portfolio allocation

Muhammad Zubair Mumtaz; Naoyuki Yoshino; Muhammad Zubair Mumtaz; Naoyuki Yoshino

doi:10.3934/GF.2023013

Green Finance

2023, Volume 5, Issue 3: 321-342. doi: 10.3934/GF.2023013

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Research article

Aftermarket performance of green IPOs and portfolio allocation

Muhammad Zubair Mumtaz ^{1,2
,
,},
Naoyuki Yoshino ^3,4

1.
College of Business Administration, University of Bahrain, Sakhir, the Kingdom of Bahrain
2.
School of Social Sciences & Humanities, National University of Science and Technology, Islamabad, Pakistan
3.
Keio University, Tokyo, Japan
4.
Tokyo Metropolitan University, Tokyo, Japan

Received: 18 April 2023 Revised: 18 June 2023 Accepted: 26 June 2023 Published: 04 July 2023
JEL Codes: G11, G12, G23

This study examines the aftermarket performance of high-green and low-green IPO and how green IPOs can optimize portfolio allocation. We assume the higher level of greenness increases investors' participation in IPOs. To this end, we develop the utility function and determine that investors prefer to participate in new issues when firms account for greenness measures. This study proposes the global aspects of green measure: the desired level of greenness a firm maintains. We find that IPOs in our sample are far below the global standards of greenness. This evidence suggests they must adopt the necessary actions to make the environment green. Another significant contribution of this study is to measure the performance of high and low-green IPOs in short- and long-run horizons. This study reveals that high-green IPOs are less underpriced. This study estimates the effect of greenness on initial returns and finds an inverse relationship suggesting that high-green IPOs are less underpriced due to lower risk associated with new issues. In terms of measuring longer-term performance, this study determines that high-green IPOs underperform less than low-green IPOs.
- greenness index,
- IPOs,
- emissions,
- global measures of greenness,
- short- and long-term performance
Citation: Muhammad Zubair Mumtaz, Naoyuki Yoshino. Aftermarket performance of green IPOs and portfolio allocation[J]. Green Finance, 2023, 5(3): 321-342. doi: 10.3934/GF.2023013

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Abstract

This study examines the aftermarket performance of high-green and low-green IPO and how green IPOs can optimize portfolio allocation. We assume the higher level of greenness increases investors' participation in IPOs. To this end, we develop the utility function and determine that investors prefer to participate in new issues when firms account for greenness measures. This study proposes the global aspects of green measure: the desired level of greenness a firm maintains. We find that IPOs in our sample are far below the global standards of greenness. This evidence suggests they must adopt the necessary actions to make the environment green. Another significant contribution of this study is to measure the performance of high and low-green IPOs in short- and long-run horizons. This study reveals that high-green IPOs are less underpriced. This study estimates the effect of greenness on initial returns and finds an inverse relationship suggesting that high-green IPOs are less underpriced due to lower risk associated with new issues. In terms of measuring longer-term performance, this study determines that high-green IPOs underperform less than low-green IPOs.

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