Environmental pollution and IPO pricing efficiency: evidence from heavily polluting firms in China

Over the past four decades, China has achieved striking economic growth, but with it has come severe environmental issues. The government has promised to mitigate these problems through the capital market. By analyzing 1,908 initial public offerings (IPOs) with private control from 2008 to 2019, we find that heavily polluting IPO firms have lower short-term returns and long-term underperformance. Portfolio tests suggest that building zero-investment portfolios by buying non-polluting firms and selling polluting firms could generate annualized premiums of 3.6% to 6% in the three years after an IPO, and these premiums are higher in the short term than in the long term. Being a heavily-polluting firm signals future competitive challenges and increased market concerns, impacting stock trading post-IPO. Our findings indicate that market concerns induced by environmental pollution have real effects on trading, contributing new insights into the implications of being a polluting firm.