Green IPOs: a new paradox in environment or economic sustainability

Purpose Green finance has traditionally focused on environmental sustainability and protection. However, it is imperative to explore this concept in terms of achieving economic goals sustainably while preserving the planet for future generations. This study examines the pricing efficiency of green and non-green Initial Public Offerings (IPOs) listed on the Alternative Investment Market (AIM), identifies factors affecting environmental and economic sustainability and determines the dynamic relationship between a firm’s environmental performance and IPO pricing in the short and long term. Design/methodology/approach Using a sample of 655 IPOs listed on AIM between 2005 and 2020, the study employs stochastic frontier analysis, three-stage least squares and Johansen co-integration techniques to test its hypotheses. Findings The results indicate that green IPOs tend to be underpriced in the short term but outperform non-green IPOs over longer investment horizons. This pattern suggests a negative short-run relationship between environmental performance and initial returns, likely attributable to the higher compliance and disclosure costs incurred by firms with stronger environmental credentials. These upfront costs may reduce initial investor returns. In contrast, the long-term performance of green IPOs surpasses that of their non-green counterparts, reflecting the market’s eventual recognition of their sustainability orientation. Furthermore, the analysis identifies a significant co-movement between a firm’s greenness index and its aftermarket pricing behavior, implying that environmental orientation plays a meaningful role in enhancing long-term economic sustainability. Research limitations/implications Our results corroborate the notion that high-quality financial statements can mitigate information asymmetries. Green IPOs encounter less ex-ante uncertainty due to their reduced environmental risk profile. This diminution in the information gap between informed and uninformed investors concerning green IPOs translates into lower price inefficiency in the marketplace. Practical implications Our findings offer critical insights for market participants, regulators, and policymakers. They underscore the importance of governance mechanisms in influencing firms’ environmental behaviors and highlight the financial implications of green initiatives in the short and long term. Social implications The board is pivotal in a firm’s decision to go green. Independent board members with strong industry connections can positively impact a firm’s propensity to adopt green practices. Such independence fosters optimistic market perceptions and can help alleviate the “legitimacy deficit” often experienced by IPO firms. This “responsible look,” emanating from board representation, sends a powerful message to investors and market analysts about the intrinsic value of the firm. Originality/value This study contributes to the literature by developing a greenness index and analyzing the performance of IPOs on AIM over short and long horizons. It also examines the co-integration between IPO greenness and aftermarket pricing behavior, offering new insights into the impact of environmental performance on economic sustainability.