Research in International Business and Finance 61 (2022) 101628

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Research in International Business and Finance

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Are green IPOs priced differently? Evidence from China

Zhuqing Wang, Xinyu Wang *, Yan Xu, Qiuying Cheng
School of Economics and Management, China University of Mining and Technology, Xuzhou, Jiangsu, China

A R T I C L E I N F O A B S T R A C T

Keywords: Green IPOs raise funds for companies with environmental governance consciousness to promote
Green stock sustainable development. This paper aims at investigating the pricing behavior of green IPOs and
IPO pricing efficiency revealing the heterogeneity in pricing efficiency in the primary market and initial returns in the
Underpricing
secondary market among green IPOs and non-green IPOs in China. Adopting stochastic frontier
Initial return
analysis, we disentangle deliberate premarket underpricing from the observed initial return. We
find that both the green and non-green IPOs are underpriced, but green IPOs have a lower
underpricing and relatively higher pricing efficiency because of market participants’ green con­
sciousness. Besides, we find that the IPO pricing efficiency cannot significantly explain its first-
day initial return, while investor sentiment and heterogeneity in firms’ green consciousness
contribute more to initial returns.

1. Introduction

Unusual climate change in recent years has increased the focus on environmental protection and made the development of green
finance more urgent. The 2015 Paris Agreement signed by the parties to the United Nations Framework Convention on Climate Change
(UNFCCC), reached a consensus on overcoming climate change. China delivered an important commitment to “strive to reach the peak
of carbon emissions by 2030 and work towards carbon neutrality by 2060”, effectively fulfilling its environmental obligations related
to climate change and biodiversity. This poses a huge challenge to China’s energy supply, economic structure, and even social
environment.
However, the International Energy Agency (2014) estimates that $53 trillion in energy-related investments will be needed by 2035
to achieve the Paris Agreement’s target of maintaining a 2 ◦ C temperature threshold. Financing mitigation to climate change and
sustainable development is one of the significant challenges in reducing greenhouse gas (GHG) emissions (Zhang et al., 2019). The
surge in demand for green investments cannot be ignored. Green finance is the “financing of investments that provide environmental
benefits” (IFC, 2017), which is a key financial instrument dedicated to promoting the realization of energy transformation and building
an ecological society. Greening the capital market is an important element in building a national green financial system. Green IPO as
an essential component of the green financial system, can raise funds for environmentally conscious companies and contribute to the
achievement of sustainable development goals (Mumtaz and Smith, 2019). Supporting the green behavior of enterprises through IPO
can not only guide social capital to restrain the blind expansion of high-emission industries and promote the development of
low-carbon green industries, but also facilitate the green transformation of enterprises. As an sustainable innovative financial product,

* Corresponding author at: School of Economics and Management, China University of Mining and Technology, No. 1 Daxue Road, Xuzhou
221116, China.
E-mail addresses: zhuqing@cumt.edu.cn (Z. Wang), wangxinyu@cumt.edu.cn (X. Wang), xuyan@cumt.edu.cn (Y. Xu), qycheng@cumt.edu.cn
(Q. Cheng).

https://doi.org/10.1016/j.ribaf.2022.101628
Received 13 May 2021; Received in revised form 16 November 2021; Accepted 6 February 2022
Available online 14 February 2022
0275-5319/© 2022 Elsevier B.V. All rights reserved.
Z. Wang et al. Research in International Business and Finance 61 (2022) 101628

green IPOs will offer a new alternative asset class for global investors, whereas analyzing the green IPO pricing behavior will provide
more references for the development of green equity financing in the future.
IPO pricing affects the efficiency of capital allocation and the interests of all market participants. Studies show that IPO under­
pricing is a typical phenomenon in global capital markets, resulting in a loss of IPO pricing efficiency (Ibbotson and Jaffe, 1975; Ritter,
1991; Loughran et al., 1994; Choie, 2016; Rathnayake et al., 2019) and a spurious impression of persistent initial excess returns on the
first day of listing (Mumtaz et al., 2016). There are two contrasting theoretical explanations for initial returns. On the one hand, the
secondary market is considered to be efficient and investors are rational, as assumed in most of the prior literature. So, initial returns
are generated from deliberate underpricing by issuers and underwriters as an outcome of information asymmetry around the value of
IPOs among participants in the primary market (Baron, 1982; Rock, 1986; Allen and Faulhaber, 1989). On the other hand, investors are
accepted to behave in inadequate rationality, under the external informative influence (Shleifer, 2000). Thus, the alternative theory
believes that IPOs are priced at their intrinsic value in the primary market, and ascribes persistent initial returns to the irrational
mispricing in early aftermarket trading activities (Aggarwal, 2003; Ellis, 2006). This theory is validated with the development of the
theoretical system of behavioral finance (Aggarwal and Rivoli, 1990; Miller, 2000; Baker et al., 2003). However, to the best of our
knowledge, little work has concentrated on the applicability of the relevant theory to the pricing behavior of China’s green IPOs.
Recently, richer research results have been obtained about the issue of corporate social responsibility. In particular, environmental
responsibility has attracted widespread attention from governments, investors, creditors and other users of corporate financial in­
formation. In general, environmental risk factors may affect corporate performance in three ways. First, stricter environmental
standards and gradual tightening of green development policies may have an impact on corporate asset and liability structures, as well
as cash flows. Second, energy efficiency losses and pollutant emissions of corporates may lead to potential social responsibility costs.
What’s more, the financing costs for companies and projects in environmentally sensitive sectors will vary, as will the willingness of
investors and financial institutions to commit capital. Third, environmental incidents and environmental management capabilities
may pose reputational risks to enterprises and financial institutions. By contrast, environmentally conscious companies can effectively
avoid the potential costs of corporate social crises and environmental disasters, resulting in long-term benefits for shareholders and
other stakeholders.
Subsequently, the first strand of studies investigates the association between firms’ environmental performance and market per­
formance. Many studies believe that it is financially beneficial for a firm to be green. For example, Klassen and McLaughlin (1996) once
confirm that there is a significant positive correlation between environmental performance and corporate returns. In line with this,
Yamashita et al. (1999) report that the stock returns of companies with the worst environmental conscientiousness (EC) scores are
lower than average market performance. Then, Derwall et al. (2005) also argue that a portfolio of companies with high environmental
scores will outperform a portfolio of companies with low environmental scores over 1997–2003, using a four-factor model based on
eco-efficiency scores. Conversely, some other studies show that the variation between firms’ green scores may negatively affect stock
prices (Meric et al., 2012) or cannot explain the variation between stock prices (Prober et al., 2015).
Another strand of literature discusses whether there are significant differences in performance between Socially Responsible In­
vestment (SRI) funds and conventional funds, and propose the underperformance hypothesis and the overperformance hypothesis. The
majority of the findings either support the underperformance hypothesis or submit no significant difference in performance. In line
with White (1995), Chang et al. (2012) compare the returns of U.S. environmental mutual funds with those of conventional funds over
time and argue that the latter will outperform the former. Through a comparative analysis, Ibikunle and Steffen (2017) also suggest
that European green mutual funds have underperformed traditional funds between 1991 and 2014. In contrast, Climent and Soriano
(2011) confirm that the market performance of U.S. environmental mutual funds was not significantly different from that of traditional
funds during the period 2001–2009.
Besides, theory and evidence on the impact of environmental performance on firms’ IPO pricing and market performance are
limited. The underperformance hypothesis suggests that the risk-adjusted returns of environmentally-friendly firms should be lower
than those of conventional firms. Since investment opportunities for environmentally-friendly firms are limited by non-financial in­
dicators, in support of arguments that environmentally-friendly practices will afford higher costs. The expected stock returns of green
firms may underperform in the short term if the costs invested to mitigate environmental risks translate into lower profits (Brammer
et al., 2006; Cai and He, 2014; Mumtaz and Yoshino, 2021).
On the contrary, the overperformance hypothesis argues that companies with higher social responsibility can effectively avoid the
potential costs of social crises and environmental disasters in the long run, thus accumulating more wealth for shareholders. This also
supports the argument that environmental social responsibility can be supposed as an undervalued corporate intangible asset
contributing to long-term excess returns (Cai and He, 2014). Chan and Walter (2014) also support the overperformance hypothesis by
investigating the IPO and SEO performance of 748 environmentally friendly stocks listed on U.S. stock changes. They argue that the
underpricing of green IPOs and SEOs is not significantly different from that of non-green stocks. While green stocks will outperform
non-green stocks in the long term and a green equity premium is evident in returns. Further, Levi and Newton (2016) find that green
stocks outperform the long-run risk adjusted returns of the most polluting stocks by 3.7% per year. Instead, Anderloni and Tanda
(2017) reveal that while green companies have a lower underpricing in the short run, both green and non-green perform similarly in
the long run. As a result, there is still a debate about the pricing and aftermarket performance of green and non-green IPOs.
So, we attempt to evaluate the pricing behavior in terms of the pricing efficiency and initial excess returns for a sample of green and
non-green IPOs issued on China’s market between 1996 and 2018. Previous studies interpreted positive and persistent average initial
return as a combination of deliberate underpricing in the primary market and mispricing associated with early aftermarket trading
activities. However, referring to Reber and Vencappa (2016), we disentangle the deliberate underpricing from the observed initial
returns by stochastic frontier analysis (SFA) to identify the more dominant drivers of initial returns. Introducing several pricing factors

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in the SFA model, we obtain the frontier estimates of “fair” offer prices for IPOs. Then, we discuss whether the green consciousness of
firms can significantly affect the IPO pricing efficiency through the comparison between green and non-green IPOs. Our results show
that both groups of IPOs are underpriced, but green IPOs have a lower deliberate underpricing and relatively higher pricing efficiencies
because of market participants’ green consciousness. It suggests that the presence of green consciousness may reduce the uncertainty
associated with new issues.
Further, we employ the technical pricing efficiency of IPOs estimated by the SFA model as an alternative to deliberate underpricing,
and introduce proxies for investor sentiment as well as a green dummy variable in the quantile regression (QR) model. Pieces of
evidence show that the deliberate underpricing in the primary market cannot significantly explain the excess initial return, while the
investor sentiment, as well as differences in green consciousness, are the more dominant factors in initial returns. This research
contributes to the existing literature providing further insight on the pricing behavior of green IPOs, with a particular focus on green
finance and sustainable development.
The remainder of this paper is organized as follows. Section 2 describes the data, variables, and main methodology. Section 3
discusses the empirical analysis process and results, and Section 4 concludes.

2. Data and methodology

2.1. Data selection

2.1.1. Green IPO data

At present, environmentally-friendly investments are gradually developing. But, there is a lack of a clear definition of green stocks
and a reference to a unified evaluation system in the international market. Therefore, combining relevant market practice and distilling
common influencing factors, scholars worldwide are trying to explore the boundaries of such green investments. Table 1 summarizes
the main approaches currently used for classifying and evaluating green observations.
In practice, existing green stock indices provide a reference for constructing green stock portfolios. We attempt to develop a
relatively comprehensive database of green IPOs listed in China’s A-share market during 1996–2018.1 Our sample interval covers the
evolution of green finance in China from its emergence to its gradual development. In 1995, the “Circular on the Use of Green Credit to
Promote Environmental Protection” issued by China’s State Environmental Protection Administration and “the Circular on Issues
Related to the Implementation of Credit Policies and Strengthening Environmental Protection” issued by the People’s Bank of China
marked the emergence of green finance in China. Since 2007, the government has introduced a variety of green financial regulatory
policies to promote the green transformation of China’s economy. China’s 11th Five-Year Plan (2006–2010) and 12th Five-Year Plan
(2011–2015) place significantly greater emphasis on energy conservation, emission reduction and environmental protection, setting
binding targets for reducing energy consumption per unit of GDP and emissions of major pollutants, respectively. Also, financial
institutions have gradually diversified green financial products and expanded the scope of supported projects. China’s green finance
has entered a rapid development stage. Fig. 1 shows that the offering size of green IPOs reached a peak between 2006 and 2010. From
2015 to the present, China’s green finance is stepping into the scale-up stage of development, and the green financial system is being
established and improved progressively. At this time, the offering size of green IPOs reached another climax and gradually stabilized.
Our observations of green IPOs are selected from constituents of the China Securities (CSI) Green Stock Indices, shown in Table 2.
The earliest domestic green stock index was published in 2007. We also realize that selecting a sample for the period prior to index
development involves a strategy that cannot be implemented in actual trading (Chan and Walter, 2014). However, IPOs cannot be
replicated and simulated because all observations must be listed before they are incorporated into the stock pool of the CSI Green Stock
Indices. We focus on the pricing behavior of IPOs rather than their long-term aftermarket performance. Therefore, we assume that a
green firm is considered as a valid observation if it remains a constituent in one of the green stock indices at the final point of the
sample period and the fundamental nature of its industry classification has not changed after 2007. After excluding the ST, *ST, and
those IPOs with missing information data, a total of 386 green IPOs were obtained as a group.

2.1.2. Matching non-green IPOs data

Referring to the practice of Chan and Walter (2014), we select “control” non-green stocks that match our green stocks based on
three indicators of the listing year, industry sectors, and total market capitalization, using adjusted criteria. First, we select the cor­
responding non-green stocks listed in the current year and the first three years of green stocks. Second, a “control” non-green stock is
selected from the same industry code as green stock according to the China Securities Regulatory Commission (CSRC) classification. If
a corresponding sample cannot be found, the same broad industry classification category is used. Then, non-green stocks are matched
on total market capitalization, using the closest one within a range of 10–250% of that of green stocks. Among total green stocks, we
removed several green stocks that could not be matched properly on the basis of these criteria. Finally, 365 green stocks and 351
“control” non-green stocks constitute a sub-sample group. The above selection process will make the comparison results relatively
more informative.

1
The IPO data are obtained from the WIND Financial Database at https://www.wind.com.cn and the China Stock Market & Accounting Research
Database (CSMAR) at https://www.gtarsc.com/.

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Table 1
The definition and evaluation system of green stocks.
Definition system Explanations Practice

Green industry The Handbook of National Accounting: “Integrated Environmental and Economic Accounting, Sustainablebusiness.com, and the low carbon industry classification system established by FTSE,
commonly referred to as SEEA-2003” (United Nations, 2003) provides a complete classification etc.
of environmental industries. It divides the main activities of the environmental industries into
three groups: resource management, clean technologies and products, as well as pollution
management. China’s State Environmental Protection Administration also proposes a definition
of green industry.
Green revenue This is essentially an analysis of the green sources of a company’s business, accounting for the The Carbon Clean 200 Index developed by Corporate Knights, the “Industry Segment Green Rating”
4

level of comprehensive green revenue and the proportion of green profit in each company’s system established by HIP Investor, the LCE (Low Carbon Economy) green income model by FTSE,
operating profit. etc.
Green This is primarily the ratio of a company’s green revenue to its energy consumption. The Global 100 Index developed by Corporate Knights
productivity
Environmental The evaluation criteria mainly includes carbon emissions, energy consumption and pollutant The Environmental, Social, Governance (ESG) disclosure guidance developed by the World
impacts emissions that affect ecological changes. Federation of Exchanges (WFE) in cooperation with the Sustainable Stock Exchange initiative (SSE).
In addition, the Carbon Disclosure Project (CDP) is committed to improving the environmental

Research in International Business and Finance 61 (2022) 101628

impact data platform.
Environmental Environmental risk is measured by searching for publicly available information about the The ESG risk evaluation system established by Rep Risk.
risks company’s environmental performance, such as reports of news events and decisions on
environmental penalties. At the same time, the environmental risk of a company can be scored in
terms of its carbon footprint, ecological impact, energy consumption, waste of resources, waste
emissions, and so on.
Z. Wang et al. Research in International Business and Finance 61 (2022) 101628

Fig. 1. The size of financing for green IPOs.

2.2. Variables

Table 3 lists the variables used in the SFA model and the later QR model, as well as their definitions. The offer price is essentially a
discount on the future expected earnings of the business, which depends on its true intrinsic value. We design several financial var­
iables to estimate the IPO pricing efficiency, considering the corporate quality, market conditions, governance factors, risk charac­
teristics, underwriter reputation, and difference in green consciousness.
Krinsky and Rotenberg (1989) argue that a firm’s historical accounting information reflects its value. As proxy variables of
corporate quality, the net assets per share (NAPS) and earnings per share before issuance (EPS) reflect the profitability and operating
level of the enterprise to a certain extent. Both are essential indicators used by investors to evaluate a company’s ability to create profit
and resist the influence of external investment risks. The asset-liability ratio before issuance (ALR) reflects an enterprise’s liability
structure and operating risk. Its impact on enterprise value is relatively complicated. Correction of MM theory (Modigliani and Miller,
1963) suggests that considering the tax of corporate income, the financing cost is minimized and value is maximized when the en­
terprise liability ratio reaches 100%. But it ignores the significant risks and additional costs that may be associated with the actual
liability in the course of operation. Thus, scholars proposed the trade-off theory, regarding that the risk and additional cost of en­
terprises associated with higher levels of debt reduce the value of enterprises. The total registered capital of companies before issuance
(TRC) shows the size of the enterprise. A large enterprise generally has a lower investment risk and a higher value.
To measure the market conditions of enterprises, we take the PE, OV, WR, FEE, and PSC. P/E ratio (PE) captures general trends in
the market that may affect the behavior of investors and underwriters (Hunt-McCool et al., 1996). The industry sector variable is not
considered for the information contained in it can be compensated by PE. Generally speaking, industries with better market prospects
and growth potential have higher P/E ratios, while vice versa is lower. Offering size (OV), in addition to being a potential signal of

Table 2
Green stock indices.
Classification Index

Panel A: Sustainable development (ESG)

ESG CSI CAITONG ECPI ESG China 100 Index
CSI CAITONG ECPI ESG China 40 Index
Corporate Governance SSE 180 Corporate Governance Index
SSE Corporate Governance Index
Social Responsibility SSE Social Responsibility Index
Panel B: Environmental ecology
Green City CSI Sponge Cities Index
Carbon Efficient SSE 180 Carbon Efficient Index
Panel C: Environmental Industry
Environmental Protection Industry SSE Environmental Protection Industry Index
CSI China Mainland Low Carbon Economy Index
China Low Carbon Index
CSI Environmental Protection Industry 50 Index
CSI Environmental Protection Industry Index
CSI Metasequoia Environmental Protection Patents 50 Index
CSI Water Environment Treatment Index
Environmental Governance CSI Environmental Governance Index
CSI AEF Ecology 100 Index
New Energy CSI New Energy Vehicles Index
CSI New Energy Index
CSI Nuclear Energy and Power Index

The Green Stock Index is designed and calculated based on the prices of sample stocks with higher scores assessed
according to specific criteria. It reflects the volatile performance of the green stock market. There are currently 19
mature green stock indices sponsored by CSI, which can be broadly classified into three categories: sustainability
(ESG), environmental ecology, and environmental industry.

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Table 3
Variable definitions.
Variables Definition Perspectives

Panel A: Variables used in SFA for the estimation of deliberate underpricing

Dependent variable
OP IPO offer price
Independent variables
NAPS Net assets per share before issuance Corporate quality
EPS Earnings per share before issuance
ALR Asset-liability ratio before issuance
TRC Total registered capital of companies before issuance
PE Price-to-earnings ratio Market conditions
OV Offer volume is expressed in terms of the total number of shares offered in the IPO
WR Winning rate of inline purchase
FEE Issue fee per share, which refers to the costs in the process of preparation and issuance of shares, including underwriting
fees, sponsorship fees, other intermediary fees, printing fees, and advertising fees
PSC The proportion of shares in circulation
PSTS The proportion of the shares held by the top ten shareholders of a company to its total share capital Governance factor
BS Board size refers to the number of board directors
RISK Number of risk factors disclosed in the prospectus Risk characteristics
Age Age is a measure of the number of years since incorporation
Reputation Third-party certification of underwriters’ reputation based on the classification published by the CSRC Underwriter
reputation
GREEN Dummy variable coded one for green IPOs, while else coded zero for non-green IPOs Green consciousness
Panel B: Influencing factors of initial returns introduced in QR model
Dependent variable
AIR Market-adjusted initial returns on the first day of listing
Independent variables
EFF The technical pricing efficiency of each IPO estimated by SFA Deliberate
underpricing
GREEN Dummy variable coded one for green IPOs, while else coded zero for non-green IPOs Green consciousness
OIPR The amplitude of the opening price on the first day of trading relative to the offer price of the new shares Investor sentiment
COPR The amplitude of the closing price on the first day of trading relative to the opening price of the new shares
HLPR The magnitude of difference between the highest and lowest share price on the IPO’s first day of trading
TURNOVER The frequency with which an IPO is traded on the secondary market on its first day of trading
Control variables
OV Offer volume
PE Price-to-earnings ratio
ROE Return on equity from financial leverage before issuance
RISK Number of risk factors disclosed in the prospectus

This table presents the definitions of the dependent, independent, and control variables used in the SFA model and the later QR model. For the SFA
model, the offer price is the dependent variable. Pricing factors representing corporate quality, the market conditions, the governance characteristics,
the riskiness, and green consciousness constitute the primary value drivers of equity. As for the QR model, the dependent variable is market-adjusted
initial returns on the first day of listing. It is explained by several indicators proxying different types of investor sentiment, as well as the green dummy
variable and the technical efficiency of IPO pricing in the primary market estimated by the SFA model. The other control variables were selected based
on those mentioned in the relevant literature as having an impact on initial return.

issuers’ size, is also significant to affect investors’ and underwriters’ judgment of the market. To a certain extent, the winning rate (WR)
can reflect investors’ sentiments and preferences. A significant portion of the issue fee (FEE) is the underwriter’s commission, which is
directly related to the costs of discovering the value of firms and accordingly affects the pricing of IPOs (Hughes, 1986). As for PSC, a
lower proportion of shares in circulation make it easier to form the illusion that the market is in short supply and leads to competing
purchases by investors.
To comply with the environmental measures, variables related to governance may be also crucial to IPO pricing. The proportion of
shares held by the top ten shareholders of a company to its total share capital (PSTS) and board size (BS) capture the governance
characteristics of the company. What’s more, the risk-return trade-off theory states that companies with higher offer risk are expected
to have higher returns. So, two variables are also introduced to control for the riskiness of IPOs: the number of risk factors disclosed in
the prospectus of firms (RISK) and the age of the firm since incorporation (Age). RISK implies the overall risk level that the enterprise
may face in the future, which is an important reference for investors. While the age of the firm may be a proxy for a reduction in ex ante
uncertainty (Ritter, 1987; Rathnayake et al., 2019). So, we introduce Age as a complement to RISK in the subsequent robustness
analysis.
In contrast to Hunt-McCool et al. (1996) and Koop and Li (2001), we attempt to control for underwriter reputation (Reputation) in
the robustness analysis. As an important intermediary between investors and issuers, underwriters with a good reputation can mitigate
information asymmetry in offerings by serving as a certification function (Duarte-Silva, 2010). Based on the third-party certification of
underwriter reputation published by the CSRC, we assign the value of one to the top 10 securities dealers and zero to the rest. In
particular, we introduce a green dummy variable (GREEN) to explore whether the heterogeneity of firms’ green consciousness affects
the determination of offer prices. We believe that the green consciousness and greenness of green IPO samples is relatively higher,

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Table 4
Descriptive statistics of variables.
Sub-sample of green and non-green IPOs Full sample of green IPOs
Variables
Mean S.D. Skew. Mean S.D. Skew.

Panel A: Descriptive statistics for variables used in the SFA model

OP 15.20 14.14 2.97 15.51 13.99 2.20
NAPS 2.86 2.21 4.31 2.89 2.23 4.19
EPS 0.68 1.00 15.38 0.72 1.26 14.07
ALR(%) 52.67 15.20 − 0.26 54.89 16.42 0.04
TRC 738396581 3739099549 16.35 2441139486 16290450207 12.54
PE(%) 30.14 19.42 1.65 29.84 19.85 1.66
OV 161660570 621107703 11.7 305587207 962133889 6.80
WR(%) 1.05 2.52 7.90 1.00 1.85 5.25
FEE 0.87 0.93 2.38 0.84 0.89 1.86
PSC(%) 24.94 8.51 0.53 24.73 9.61 0.60
PSTS(%) 69.95 10.75 − 0.6 69.71 10.53 4.88
BS 9.38 2.25 1.14 9.63 2.61 1.36
RISK 16.26 6.02 0.92 16.62 6.59 0.90
Age 6.49 5.48 0.99
Reputation 0.42 0.49 0.33
GREEN 0.51 0.50 − 0.04
Panel B: Descriptive statistics for influencing factors of initial return introduced in QR model
AIR(%) 83.30 75.70 1.65
EFF 0.51 0.50 − 0.04
GREEN 72.74 13.17 − 1.14
OIPR(%) 126.92 91.36 0.85
COPR(%) 5.03 12.69 3.64
HLPR(%) 15.42 16.70 6.09
TURNOVER(%) 54.26 28.03 − 0.88
OV 161660570 621107703 11.7
PE(%) 30.14 19.42 1.65
ROE(%) 25.27 12.97 1.36
RISK 16.26 6.02 0.92

while that of the corresponding non-green IPOs is poor. We then assign the value of green IPOs to one and the value of non-green IPOs
to zero. We use the natural logarithmic value of OP, TRC, OV, and Age.
The adjusted initial return (AIR) is chosen to characterize the premium in the early aftermarket activities for IPOs (Boulton et al.,
2010), which is calculated as follows:
Pit − Pio Iit − Iio
AIRi = − , (1)
Pio Iio

where Pit is the closing price of stock i on the first day of listing and Pio is the offer price of stock i, respectively. While Iit is the closing
point of the market index value on the first day of listing and Iio is the closing point of the market index value on the offering date of
stock i. Eliminating the impact of market movements and overall earnings situation on initial returns can better reflect the performance
of IPOs in early aftermarket trading activity.
The overperformance hypothesis suggests that firms with more environmental consciousness can effectively avoid the potential
costs of social crises and environmental disasters. Investors may adjust their own decisions referring to such information and tilt their
capital towards green firms, resulting in a “green premium”. So, the green dummy variable (GREEN) is also introduced into the QR
model to investigate the potential impact of differences in firms’ green consciousness on initial excess returns. What’s more, the
technical pricing efficiency (EFF) of each IPO estimated by the SFA model is employed as a proxy for the deliberate underpricing in the
primary market. We aim to verify whether it is a factor contributing to initial excess returns in early aftermarket trading.
Additionally, according to the argument of the investor sentiment hypothesis, investor sentiment and IPO initial returns are
significantly related (Boulton et al., 2010; Mumtaz et al., 2016; Wong et al., 2017). We employ several proxies based on investor
sentiment to explain the initial excess returns. First, this paper captures the sentiment of “avid investors” by the amplitude of the
opening price relative to the offer price of IPO (OIPR). The offer price is determined at the inquiry stage. While the opening price on the
first day of listing is determined at the collective bidding stage, based on the quotes given by investors and in accordance with the
principle of maximum volume. The larger the gap between the opening price and the offer price, the more optimistic the investors are,
to a certain extent. Since trading in China’s market is subject to strict short-sale constraints, it is difficult for pessimistic investors to
express their bearish intentions through short-sale operations. Thus, the participation of optimistic investors allows for the mispricing
of IPOs, generating initial returns. Second, we model the amplitude of the closing price relative to the offer price of the new shares
(COPR) as a measure of sentiment for “positive feedback traders”. Such participants make decisions in the light of historical infor­
mation. They will chase higher opening prices for IPOs and aggressively purchase the stock during the continuous bidding phase. Then,
the market behavior of “noise traders” can be demonstrated by the magnitude of difference between the highest and lowest trading
price (HLPR) and the turnover rate on the first day of trading (TURNOVER). Noise traders’ sentiment leads to heterogeneous

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expectations among investors, which in turn accounts for the premium in early aftermarket (Miller, 2000). Table 4 presents summary
descriptive statistics for pricing factors of IPO and influencing factors of initial return.

2.3. Methodology

2.3.1. Stochastic frontier analysis

Stoll and Curley (1970) evaluate the pricing efficiency of IPO by the difference between the IPO offer price and its first-day closing
price. It implicitly assumes that the market is efficient. However, investigations based on such assumption may incorrectly attribute
initial returns to deliberate underpricing in the primary market, while ignoring the bubble in the secondary market.
Distinguishing from traditional measures, Hunt-McCool et al. (1996) first apply SFA to study the pricing of IPO. As this approach
allows for the assessment of deliberate underpricing without any aftermarket data, it enables the decomposition of initial excess
returns into deliberate premarket underpricing and aftermarket mispricing (Reber and Vencappa, 2016). It is more applicable to
measure the IPO pricing efficiency in China’s capital market. We use SFA to estimate the frontier of “fair” offer prices in the absence of
information asymmetry. Then the deviation between the observed offer price and the estimated “fair” offer price is defined as
“deliberate underpricing”. The greater the difference, the lower the IPO pricing efficiency. The stochastic frontier of the offer price is
defined as:

⎧ Pi = f (Xi , β) + ei ,
⎪
⎪
⎨ ei = vi + ui ,
(2)
⎪ 2
⎩ vi ∼ N(0, σ v ),
⎪
ui ∼ N − (0, σu 2 ),

where Pi is the observed offer price of the IPO, while Xi is a vector of pricing factors that affects the IPO pricing as the explanatory
variable. β is a parameter vector of the coefficients corresponding to Xi. The term f(Xi, β) describes the relationship between offer prices
and pricing factors, which is usually supposed as the Cobb–Douglas function form. ei is the composite residual term, containing both vi
and ui components. vi is a symmetric error term caused by random factors, which is commonly assumed to have a normal distribution.
The degree of deliberate underpricing is captured by the asymmetric error term ui, which is commonly assumed as the left-half of a
normal distribution truncated at zero.

Table 5
Estimates of stochastic pricing frontiers for a full sample of green IPOs.
QR level
Variables MLE OLS
0.1 0.25 0.5 0.75 0.9

Constant 3.9874*** 3.8442*** 3.5086*** 4.0751*** 3.0627*** 2.3435*** 2.4694***

t-statistic 8.9794 8.8105 6.9555 8.8791 5.2641 3.4026 4.0302
NAPS 0.0627*** 0.0644*** 0.0708*** 0.0558 − 0.0073 0.0065 0.0029
t-statistic 4.7046 5.0015 6.8396 1.3193 − 0.2285 0.1978 0.0876
EPS 0.0615** 0.0291 − 0.0143* 0.2577 0.6986*** 0.7829** 0.7940*
t-statistic 2.2575 1.4505 − 1.7751 1.2301 2.603 2.5395 1.9058
ALR − 0.0001 − 0.0008 − 0.0017 − 0.0014 − 0.0006 − 0.0007 0.0014
t-statistic − 0.0473 − 0.4935 − 0.5875 − 0.5953 − 0.4875 − 0.4901 1.0519
lnTRC 0.0526 0.02 − 0.2687** − 0.1993* 0.0279 0.1009* 0.1924**
t-statistic 1.0023 0.3835 − 2.3428 − 1.9582 0.4612 1.7337 2.3496
PE 0.0116*** 0.0115*** 0.0117*** 0.0147*** 0.0172*** 0.0223*** 0.0210***
t-statistic 7.8025 7.5505 5.1792 5.9272 7.6255 6.2754 7.3003
lnOV − 0.1459** − 0.1171* 0.1686 0.0727 − 0.1105 − 0.1561** − 0.2664***
t-statistic − 2.4188 − 1.9446 1.3437 0.6684 − 1.62 − 2.4871 − 2.6974
WR 0.0295** 0.0309** 0.0319*** 0.0107 − 0.002 0.0197 0.016
t-statistic 2.3461 2.4263 3.2296 0.8992 − 0.1835 1.3462 1.3303
FEE 0.3562*** 0.3650*** 0.3554*** 0.2443*** 0.2136*** 0.108 0.1215
t-statistic 8.1503 8.3778 8.8361 3.9752 3.6436 1.5989 1.423
PSC − 0.0094*** − 0.0093*** − 0.0059 − 0.0136*** − 0.0044 − 0.0029 − 0.0003
t-statistic − 2.9617 − 2.9438 − 1.3587 − 4.6395 − 1.2421 − 0.7574 − 0.0698
PSTS − 0.0025 − 0.0034 − 0.0004 − 0.0005 − 0.0013 0.0001 0.0015
t-statistic − 0.9037 − 1.2353 − 0.1053 − 0.119 − 0.5441 0.0224 0.5056
BS − 0.003 − 0.0037 − 0.0004 0.0109 − 0.008 − 0.0028 − 0.0017
t-statistic − 0.3128 − 0.3708 − 0.023 1.0079 − 1.0699 − 0.3048 − 0.1306
RISK − 0.0026 − 0.0022 − 0.0054 0.0003 0.0012 − 0.0008 − 0.0016
t-statistic − 0.7246 − 0.6077 − 0.6399 0.0877 0.4691 − 0.2644 − 0.2733
σ2 0.3252***
t-statistic 6.9706
γ 0.6564***
t-statistic 6.2098

***, **, and * show significance at 1%, 5% and 10% level respectively.

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Z. Wang et al. Research in International Business and Finance 61 (2022) 101628

Aigner et al. (1977) derived the probability density of the composite residual term in Eq. (2) as:
∫∞ / / /
f (ei ) = f (ui , ei ) dui = 2 σ Φ(ei σ)[1 − F(λei σ)], (3)
0

where λ = σ u /σ v , σ2 = σ 2u + σ2v , F(⋅) and Φ(⋅) are the distribution function and density function of the standard normal distribution,
respectively. The parameters of Eq. (2) are estimated through maximum likelihood (MLE) techniques on the following log-likelihood
function:
√̅̅̅/√̅̅̅ ∑ / / ∑
lnL = Nln( 2 π) + Nlnσ− 1 + ln[1 − F(ei λ σ )] − (1 2σ2 ) e2i . (4)

In practice, the parameter γ = σ2u /(σ2u + σ2v ) is proposed by Battese and Corra (1977) to reflect the deviation degree between
asymmetric error and overall error, which is an essential index to measure the effectiveness of IPO pricing. Further, EFFi = exp(− ui) is
used to measure the efficiency of IPO pricing, which is calculated as Eq. (5).
( )
1 − Φ(σ A + γei /σ A ) σ2
EFFi = exp γei + A , (5)
1 − Φ(γei /σ A ) 2
√̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
where ei = Pi − f(Xi, β′ ), σ A = γ(1 − γ)σ 2 , and EFFi ∈ (0, 1).

2.3.2. Quantile regression

QR model essentially analyzes how potentially slight changes in the independent variables affect the conditional distribution of the
dependent variable at different quantiles. It places more emphasis on data at extreme locations. Multiple linear regression, on the other
hand, requires random error terms with zero mean and equal variance. If the fitness distribution of the data is leptokurtic or there are
some outliers, the results of multiple linear regression will lack robustness.
For the general linear regression model yi = βXi + εi, the parameters at a given θ level are estimated by minimizing the weighted
absolute deviation as follows:
[ ]
∑ ∑
min θ(yi − βθ Xi ) − (1 − θ)(yi − βθ Xi ) . (6)
i|yi ⩾βθ Xi i|yi <βθ Xi

3. Empirical analysis

3.1. Pricing efficiency of green IPOs

This section conducts an empirical analysis on IPO pricing efficiency for a sample of 386 green stocks. We suppose the underpricing
as a function of uncertainty surrounding firm’s true intrinsic value (Beatty and Ritter, 1986) and write the offer price as:
In (OPi ) = β0 + β1 NAPSi + β2 EPSi + β3 ALRi + β4 ln (TRCi ) + β5 PEi + β6 ln (OVi )
(7)
+ β7 WRi + β8 FEEi + β9 PSCi + β10 PSTSi + β11 BSi + β12 RISKi + vi + ui .
We first introduce a relatively extended set of pricing factors in the SFA model to estimate the fair achievable offer price, which
allows us for providing more precise estimation results. Then, to analyze the pricing mechanism of green IPOs, we investigate the
relationship between offer prices and the influencing factors at the quantile pricing levels of 0.1, 0.25, 0.5, 0.75, and 0.9, respectively.
Table 5 shows the estimates of parameters.
The majority of these pricing factors are statistically significant in explaining the fair offer price across our SFA model, except for
ALR, TRC, PSTS, BS, and RISK. NAPS and EPS are significant positive value drivers. Then, the same is true of PE, WR, and FEE. Higher
PE and WR imply that investors have higher expectations for the future profitability of firms and more positive sentiment to subscribe
to the new shares, hence the IPO valuation. What’s more, our findings corroborate the evidence reported by Koop and Li (2001) that
the relationship between fees and offer prices is significantly positive. In practice, underwriters’ commission is a major component of
issuing costs. However, Reber and Vencappa (2016) report a negative correlation between underwriters’ fees and offer prices,
providing further evidence in support of findings from Hunt-McCool et al. (1996). They believe that underwriters’ fees will be higher
for IPOs that have relatively little public information disclosed, and hence exacerbate the underpricing of IPO. Conversely, OV and PSC
contribute to lower valuations of offer prices.
Instead, ALR, TRC, PSTS, BS, and RISK are not significant pricing factors of green IPOs, suggesting that they may be unlikely signals
to convey firms’ value to investors. The coefficient for ALR is insignificant, and another plausible explanation is that the trade-off
theory may be more applicable in China’s market when compared with the MM theory. Therefore, the scale of liability and the
firms’ value cannot be characterized as a simple linear relationship. Governance performance is an important component of the
corporate ESG ratings and ESG investment philosophy. However, the empirical results show that the corporate governance factors do
not significantly affect IPO pricing. This may be an indication that the ESG system in China requires further improvement and the ESG
investment philosophy remains to be widespread and developed.
In addition, to compensate investors for the losses as a result of risks, issuers may have an incentive to deliberately shift the offer

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Table 6
Stochastic pricing frontier estimates for green and “control” non-green IPOs.
Model (1) Model (2) Model (3) Model (4) Model (5)
Variables
MLE t-statistic MLE t-statistic MLE t-statistic MLE t-statistic MLE t-statistic

Constant 3.6854*** 12.0801 3.5251*** 10.7217 3.7775*** 12.286 3.6655*** 11.9649 2.6583*** 5.5603
NAPS 0.0520*** 5.6629 0.0531*** 5.7104 0.0518*** 5.6505 0.0502*** 5.2256 0.0033 0.2634
EPS 0.1265*** 5.4301 0.1271*** 5.3872 0.1270*** 5.4446 0.1274*** 5.438 0.5471*** 8.8075
ALR − 0.0014 − 1.4032 − 0.0012 − 1.1822 − 0.0015 − 1.4862 − 0.0014 − 1.3841 − 0.0013 − 0.9434
lnTRC 0.0208 0.5404 0.016 0.4074 0.0148 0.3877 0.0169 0.4358 0.0736 1.2293
PE 0.0124*** 12.331 0.0125*** 12.4049 0.0122*** 12.1246 0.0124*** 12.2858 0.0181*** 12.3567
lnOV − 0.1066** − 2.4339 − 0.1008** − 2.2861 − 0.1064** − 2.4518 − 0.1023** − 2.3207 − 0.1230* − 1.8418
WR 0.0117* 1.8751 0.0124** 1.9884 0.0124** 1.9789 0.0117* 1.8828 0.0002 0.0336
FEE 0.3303*** 12.1123 0.3260*** 11.8974 0.3294*** 12.0989 0.3278*** 11.9282 0.2061*** 5.4057
PSC − 0.0099*** − 4.4238 − 0.0082*** − 3.3729 − 0.0097*** − 4.3555 − 0.0098*** − 4.3588 − 0.0064* − 1.8168
RISK − 0.0014 − 0.5313 − 0.0016 − 0.6185 − 0.0015 − 0.5712 − 0.0016 − 0.6104 0.0008 0.1989
GREEN 0.0749*** 2.5913 0.0737** 2.5489 0.0730** 2.5564 0.0753*** 2.6058 1.6734*** 2.779
PSTS 0.0024 1.3646
BS − 0.0076 − 1.1269
Reputation 0.0661** 2.2141
10

lnAge 0.0134 0.6475

GNAPS 0.0544*** 3.1099
GEPS − 0.4709*** − 7.3212
GALR − 0.0004 − 0.1956
GlnTRC − 0.0661 − 0.8828
GPE − 0.0081*** − 4.0788
GlnOV 0.0019 0.0219

Research in International Business and Finance 61 (2022) 101628

GWR 0.0388*** 2.9298
GFEE 0.1496*** 2.7372
GPSC − 0.0043 − 0.9584
GRISK − 0.0016 − 0.334
σ2 0.2966*** 10.8384 0.2945*** 10.7892 0.2977*** 10.9288 0.2958 10.8351 0.2707*** 10.8300
γ 0.7511*** 14.9189 0.7498*** 14.7638 0.7583*** 15.5095 0.7496*** 14.8696 0.7595*** 15.3874
Obs 716 716 716 716 716

This table shows the pricing frontier estimates for green and “control” non-green IPOs. Model 1 is the basic model to estimate the frontier “fair” offer prices for IPOs and supposes the deliberate
underpricing as information asymmetry among participants in the market surrounding the value of IPOs, which is defined as Eq. (8). Model 2 expands Model 1 with two governance factors (PSTS and BS).
Model 3 augments Model 1 by controlling for the reputation of underwriters (Reputation). Model 4 combines Age as a complement to RISK to further control the riskiness of firms. While Model 5 augments
Model 1 with interaction terms generated by the green dummy variable with other explanatory variables. These interaction terms actually represent the differences in the factors associated with the
pricing of green and non-green IPOs, and their coefficients capture how the heterogeneity of the green factor affects the role of other factors on IPO pricing. ***, **, and * show significance at 1%, 5% and
10% level respectively.
Z. Wang et al. Research in International Business and Finance 61 (2022) 101628

prices down. Our results are consistent with Beatty and Ritter (1986) and Hunt-McCool et al. (1996) that the offer prices are negatively
correlated with RISKS. But the results lack statistical significance. Especially, deviations from the frontier of maximum fair offer prices
are characterized by deliberate discounting in the premarket pricing of green IPOs. The measure of γ is 0.6564, which is statistically
significant. It provides straight evidence for inferring deliberate underpricing of China’s green IPOs. And the deliberate underpricing
level of green IPOs is 65.64%, which is much higher than that of most mature markets (15%) obtained in previous literature.
We also summarize the pricing mechanism of green IPOs from the QR estimation results in Table 5. Further analysis reveals that
NAPS, WR, and PSC only have a significantly positive correlation with OP at lower price levels. While EPS and TRC have a significantly
positive impact on the pricing of green IPOs at higher price levels. PE is significantly positively correlated with OP at all quantile levels,
but the comparison indicates that the results of OLS underestimate this positive influence. The negative effect of OV on OP is sig­
nificant, and this restriction is more obvious when the offer price is relatively higher. Instead, FEE always has a positive influence on
OP, although this effect is attenuated at high pricing levels.
In summary, the pricing mechanism of green IPOs varies under different pricing levels. Higher prices of green IPOs are significantly
driven by EPS, TRC, PE and OV. While at low or middle quantile pricing levels, offer prices are more affected by NAPS, TRC, WR, FEE
and PSC.

3.2. Comparison of pricing efficiency between green and non-green IPOs

Model 1 supposes deliberate premarket underpricing as a function of ex ante uncertainty around the firm’s value, as shown as Eq.
(8). In particular, we employ a green dummy variable to classify the greenness of firms.
In (OPi ) = β0 + β1 NAPSi + β2 EPSi + β3 ALRi + β4 ln (TRCi ) + β5 PEi + β6 ln (OVi )
(8)
+ β7 WRi + β8 FEEi + β9 PSCi + β10 RISKi + β11 GREENi + vi + ui .
Then, to further measure the effectiveness of the green factor on IPO pricing, we extended our proposed benchmark (Model 1) by
adding several control variables as models (2) to (5). We obtain similar results to the estimates of the benchmark for the relationship
between pricing factors and offer prices in four extended models, further confirming the robustness of our estimation. Model 2 aug­
ments Model 1 with two governance factors. We remain unaware of a significant effect of the level of corporate governance on IPO
pricing. Model 3 augments Model 1 by adding the underwriter reputation (Reputation) as a proxy for third-party certification to reduce
the ex ante uncertainty. We find a significantly positive relationship between the underwriters’ reputation and offer price. This
suggests that reputable underwriters are better able to perform the certification function, reducing the demand for deliberate
underpricing as compensation. Age is combined to control for the riskiness of IPOs in Model 4. The results in Table 6 show that Age is
positively correlated with the maximum potential offer price, which is consistent with Hunt-McCool et al. (1996). But this relationship
likewise lacked statistical significance. In addition, we use a slope dummy variable method in Model 5 to investigate whether the
heterogeneity in the green factor affects the role of other pricing factors. We set several interaction terms of the dummy variable
GREEN with other pricing factors. The evidence highlights that the heterogeneity of the green factor significantly facilitates the
positive contribution of NAPS, WR, and FEE to offer price, but weakens the positive effect of EPS and PE on IPO pricing.
As shown in Table 6, the coefficient for GREEN is significantly positive across the models (1) to (5). The green factor may be a
highly significant determinant of IPO pricing and a potential value driver. We argue that offer prices of green stocks are usually
influenced by some non-financial indicators constraints, such as environmental responsibility. Since additional investment costs are
required for corporate environmental management, issuers will increase the offer prices to cover the costs. Meanwhile, with the
improvement of pricing marketization in China, and the promotion for green finance and sustainable development, the green con­
sciousness of market participants is gradually strengthening. Investors’ recognition of firms’ green performance or bullishness in green
industries also makes the pricing of green IPOs much more efficient.
The deliberate underpricing of green IPOs (62.05%) is much lower than that of non-green IPOs (93.99%), shown in Table 7. And
green IPOs relatively outperform non-green IPOs in terms of average pricing efficiency. From the perspective of those “green” firms,
they will pay more attention to the fulfillment of social responsibility and their long-term sustainable development. Thus, their
incentive to drive down the offer prices in pursuit of short-term excess returns will be much weaker.

3.3. Explaining initial excess returns

We attempt to mitigate the effect of extreme values on the results and portray a comprehensive overview of the impact of each
factor on initial excess returns (AIR). So, we select a quantile regression approach based on previous hypotheses to interpret the IPO

Table 7
Comparison of deliberate underpricing for green and non-green IPOs.
Statistics Sub-sample of green IPOs Sub-sample of non-green IPOs

γ 0.6205*** 0.9399***
t-statistic 5.0317 41.6378
Technical pricing efficiency 73.40% 72.04%

*** shows significance at 1% level.

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Z. Wang et al. Research in International Business and Finance 61 (2022) 101628

Table 8
Quantile regression results for AIR determinants.
QR Level
Variables
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

Constant − 1.36*** − 1.28*** − 1.26*** − 1.11*** − 1.14*** − 1.16*** − 1.23*** − 1.25*** − 1.20***
p-value 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
EFF − 0.05 − 0.03 − 0.01 − 0.02 − 0.03 − 0.01 0.00 0.00 0.01
p-value 0.19 0.47 0.85 0.43 0.32 0.60 0.94 0.94 0.87
GREEN 0.89*** 0.92*** 0.98*** 0.97*** 0.99*** 0.99*** 1.01*** 1.04*** 1.07***
p-value 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
OIPR 0.89*** 0.92*** 0.97*** 0.97*** 0.99*** 1.00*** 1.01*** 1.05*** 1.05***
p-value 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
COPR 1.44*** 1.40*** 1.48*** 1.50*** 1.49*** 1.43*** 1.50*** 1.48*** 1.50***
p-value 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
HLPR − 0.12* − 0.12* − 0.11** − 0.15*** − 0.15*** − 0.09 − 0.04 0.02 0.34***
p-value 0.06 0.09 0.03 0.00 0.00 0.27 0.52 0.88 0.00
TURNOVER 0.05** 0.05** 0.07*** 0.09*** 0.10*** 0.09*** 0.10*** 0.11*** 0.04
p-value 0.03 0.03 0.00 0.00 0.00 0.00 0.00 0.00 0.47
OV 0.02*** 0.01*** 0.01*** 0.00 0.01* 0.01* 0.01* 0.01 0.01
p-value 0.00 0.00 0.01 0.25 0.10 0.06 0.05 0.10 0.22
PE 0.09*** 0.06** 0.04 0.01 0.00 0.01 − 0.01 − 0.01 − 0.02
p-value 0.00 0.04 0.22 0.65 0.90 0.64 0.82 0.75 0.62
ROE 0.07 0.05 0.02 0.01 0.02 0.02 0.06 0.07 0.04
p-value 0.15 0.25 0.63 0.84 0.53 0.56 0.30 0.15 0.40
RISK 0.04 0.03 0.01 0.01 0.01 0.00 0.00 0.00 0.00
p-value 0.10 0.16 0.34 0.43 0.5 0.95 0.88 0.98 0.87

***, **, and * show significance at 1%, 5% and 10% level respectively.

Fig. 2. Quantile process estimation (95% CI) of AIR for green and non-green IPOs.

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Z. Wang et al. Research in International Business and Finance 61 (2022) 101628

performance in early aftermarket activities according to nine quantile levels, namely 0.1, 0.2, 0.3, 0.4, 0.5, 0.6, 0.7, 0.8, and 0.9. As
with the stochastic frontier exercise, this model is run on IPOs with positive, negative as well as zero observed AIR, so as to avoid
biasing the sample. Then, we specify AIR as the following function:
AIR = β0 + β1 EFFi + β2 GREENi + β3 OIPRi + β4 COPRi + β5 HLPRi + β6 TURNOVERi
(9)
+ β7 ln (OVi ) + β8 PEi + β9 ROEi + β10 RISKi + ε .
Table 8 shows how the pricing efficiency, the heterogeneity of firms’ green consciousness, and investor sentiment affect initial
excess returns, respectively. First, our evidence contradicts some previous findings in support of the IPO information asymmetry
theory. We verify that IPO pricing efficiency cannot adequately explain initial returns at all quantile levels, thus inferring that
deliberate underpricing in China’s primary market is not the main reason for the initial aftermarket premium. In previous studies,
scholars have mostly analyzed the extent to which the proportion of the variation in initial returns originates from the variation in
deliberate premarket underpricing. Hunt-McCool et al. (1996) report a significantly positive coefficient and Chen et al. (2002) show a
positive but insignificant relationship between underpricing and initial returns, with an R-squared between zero and 2% reported in
both papers. In contrast, Reber and Vencappa (2016) demonstrate that the coefficient for deliberate underpricing is negative and
statistically significant with an R-squared of around 3%. We, therefore, sought to explore the role played by investor sentiment and the
heterogeneity of firms’ green consciousness in the early aftermarket performance of IPOs.
The green factor has a significantly positive effect on AIR at all quantile levels, which may provide evidence for the existence of a
“green premium” in early aftermarket trading activities. The implied economics of this green premium is a compensation for the risk of
higher uncertainty in asset values. Then, Fig. 2 shows that the coefficient for GREEN increases as the quantile level rises, illustrating
that the higher the level of initial returns, the greater the contribution from the heterogeneity of firms’ green consciousness. Nowadays,
green firms are still limited by some non-financial indicators in addition to their greater investment in green equipment, green
technology R&D, and environmental management. The positive external benefits of a company’s green behavior to society cannot be
directly translated into economic benefits, which creates uncertainty in the IPO pricing and aftermarket performance of green com­
panies. Thus, investors may have an incentive to compensate for the greater risk associated with this uncertainty by capturing initial
excess returns on green IPOs.
In addition, we find that investor sentiment is another significant factor contributing to initial excess returns when compared to the
deliberate underpricing component. OIPR, which captures the sentiment of “avid investors”, and COPR, which characterizes the
sentiment of “positive feedback investors”, are significantly and positively correlated with AIR at all quantile levels, confirming that
investor sentiment and purchasing enthusiasm facilitate initial returns. The coefficients for HLPR and TURNOVER, which portray the
sentiment and behavior of “noise traders”, differ in significance at different quantile levels. A plausible explanation is that both HLPR
and TURNOVER potentially reflect market liquidity and investor heterogeneous beliefs. The higher the turnover and more frequent
trading, the more pronounced the price speculation by “noise traders”, which in turn leads to high excess returns. While the signifi­
cance of this positive outcome decreases at the ultra-low and ultra-high quantile levels. These two cases reflect, to some extent, high
investor expectations and extreme disapproval of IPOs, respectively. Investors with high expectations may stay bullish and extreme
disapproval will avoid purchasing, both of which may lead to a decrease in the frequency of trading liquidity. What’s more, HLPR has
opposite effects on AIR at different quantile levels. At the 0.9 quantile level, the coefficient of HLPR is consistent with the expected
hypothesis, while at lower initial return levels, HLPR exhibits a significant dampening effect. For this, we believe the plausible
explanation is that a higher HLPR may imply the existence of deflated trading prices and a perceived lack of investor recognition of
IPOs. The coefficients of most of the control variables are not statistically significant, except for OV and PE which have a significantly
positive effect on IPO initial returns at lower quantile levels. It suggests that the information embedded in these indicators may not be
within the primary frame of reference for secondary market investors’ decisions.

4. Conclusion and policy implications

Green IPOs are supposed as a vital approach for firms to obtain financing from the public. In this paper, we investigate the pricing
behavior of green IPOs in terms of pricing efficiency and initial returns, with a special focus on the differences between green and non-
green IPOs. To this end, we identify green IPOs listed in China’s A-share market during the period of 1996–2018 and screen to obtain
the corresponding non-green IPOs.
Deliberate underpricing can be considered as a proxy for information asymmetry between market participants around the value of
IPOs. Evidence shows that the level of deliberate underpricing is 62.05% and 93.99% for green and non-green IPOs, respectively. It
reaffirms the existence of artificial discounting by issuers and underwriters in China’s market, which may aggravate short-term
overvaluation in the secondary market. Nevertheless, green IPOs have a relatively lower underpricing and higher pricing efficiency
compared to non-green IPOs. It illustrates that the offer prices of green IPOs can reflect their true intrinsic value much better. When the
green consciousness of market participants gradually strengthens, the disclosure of information related to green IPOs can reduce the
uncertainty of issuance. So, our study provides another insight into green IPOs and the green financial market, which is helpful in the
promotion of environmentally-friendly financial instruments.
Also, we model the technical pricing efficiency as an alternative to deliberate underpricing to verify whether it is the more
dominant explanatory factor for initial excess returns in previous studies. However, we present evidence that there is no significant
relationship between the pricing efficiency of IPOs and their initial returns at all quantile levels. In contrast, the green factor and the
sentiment of investors in early aftermarket trading activities are more important in explaining initial returns, providing a complement

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to existing empirical studies. Astonishingly, we observe a positive and statistically significant effect of the green factor when analyzing
both the IPO pricing factors and the influencing factors of initial return. This provides evidence of differences in the pricing behavior of
green IPOs compared to non-green IPOs and the existence of a “green premium” in the early aftermarket period. For further research,
the persistence of the green premium and the factors responsible for its formation remains to be explored.
Currently, many countries and financial institutions are making great efforts to develop environmentally-friendly investments.
Green stock offers a new alternative asset class for global investors who wish to contribute to sustainable development with their
investment behavior. However, the scale of green stock remains a limited share of China’s A-share IPO market. We find a wide
variation in the offering market capitalization size of green IPOs. The largest offering market capitalization of our observed green IPO
is 66.8 billion (RMB) yuan, while the smallest is only 0.5 billion (RMB) yuan. Besides, we notice that the concentration of the domestic
environmental protection industry is weak. For example, the wastewater treatment field has a market capitalization of trillions (RMB)
yuan, while that of the leading companies in this industry is generally limited. Many environmental protection companies are still
suffering from poor operation and data management capabilities. Therefore, our study provides the following policy implications for
promoting environmentally-friendly investment and improving the function of the securities market in supporting companies’ green
transformation in China.
First, Chinese governmental policies should clarify the recognition criteria for green stocks and green projects, and introduce a
third-party certification mechanism to mitigate the asymmetry of environmental information. Meanwhile, it is also necessary to
strengthen the disclosure of corporate environmental information. For example, the center for climate and environmental research
(CICERO) offers a green company assessment service for issuers and NASDAQ provides a Green Stock Label Program in the European
market. Such measures can release more available green investment information to the public and make the greenness of the issuers
more convincing and attractive to investors.
Second, programs aimed at promoting green investments may work effectively with the enactment of stricter environmental
regulations and financial regulation policies. Undertaking stricter environmental regulations would subject the behavior of firms and
financial institutions to environmentally responsible performance, which could be expected to offset the negative environmental
impacts of financial development. When non-green investments have to undertake the external costs of potential environmental risks,
green investments will be relatively more attractive.
Third, substantial incentives for green enterprises to go public are still very limited, mainly focusing on the approval process of
green enterprise financing. The advantages of green firms’ financing can be enhanced by implementing multi-dimensional incentive
policies for all aspects of green firms’ issuance.
Finally, we argue that green stocks can effectively mitigate potential environmental risks, and their IPO pricing can better reflect
the value of issuers. Investment institutions should further develop green stock indices and other green stock portfolio products to
diversify and reduce investment risks, thus attracting public capital to the environmentally-friendly fields. While the government
should create a favorable financing and operating environment for green equity investment institutions.

Acknowledgements

This work was supported by the National Natural Science Foundation of China (No. 71871215), and the Postgraduate Research &
Practice Innovation Program of Jiangsu Province (KYCX21_2087).

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