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| Expected IPO Success Probability, ESG Disclosure, and IPO Outcomes |
| YE Kangtao, LU Xu, BAI Guangxi, ZHAN Xintong
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| Finance Research Center, Beijing National Accounting Institute;Business School, Renmin University of China; CRRC (Beijing) Transformation and Upgrading Fund; School of Management, Fudan University |
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Abstract Capital market regulators worldwide are increasingly paying more attention to ESG issues. This study investigates the role of ESG disclosure in a firm's IPO process. Specifically, we examine whether firms with lower likelihood of IPO success are motivated to enhance ESG-related disclosure in their IPO prospectuses and whether improved ESG disclosures can increase the likelihood of their IPO success. Enhanced ESG disclosure can reduce information asymmetry, alleviate regulators’ concerns, and signal a firm's sustainability. Drawing on signaling theory, we argue that firms with lower likelihood of IPO success have stronger incentives to use ESG disclosure as a compensating signal to offset their weaknesses in non-ESG dimensions such as financial performance, thereby improving the likelihood of IPO approval.
We use a sample of Chinese IPO applicants over the period from 2012 to 2022 to test these hypotheses. As the established ESG rating agencies such as MSCI, Refinitiv, and Bloomberg cover only listed firms, and do not provide information about IPO firms’ ESG performance, we adopt a novel method to measure an IPO firm's ESG performance based on its prospectus. Specifically, we use the information disclosed in a firm's IPO prospectus and employ a large language model (LLM) to evaluate the firm's ESG performance. First, we identify all possible ESG-related sentences from each prospectus using an ESG lexicon derived from randomly selected prospectuses. Second, based on the Hong Kong Stock Exchange's Guide on Producing Simplified Listing Documents Relating to Equity Securities for New Applications (as updated in 2020), we construct a set of 18 questions to gauge the comprehensiveness of firms’ ESG disclosure. Third, we use a large language model to score the ESG-related sentences extracted from a firm's prospectus based on the aforementioned 18 questions and then aggregate the resulting scores into a firm-level ESG disclosure measure.
We apply a rolling Logit model to estimate each firm's ex ante probability of IPO success, using a set of determinants identified in prior research including financial conditions, corporate governance, intermediary reputation, ownership, and capital market environment. We then regress firms’ ESG scores on their ex ante probability of IPO success to test whether a firm's IPO prospects influence the level of ESG disclosure. We also investigate whether ESG disclosure enhances a firm's IPO success by regressing its IPO outcome on the firm's ESG disclosure score. The empirical results support both predictions. We show that one-standard-deviation decline in expected IPO success probability is associated with 0.10-standard-deviation increase in ESG disclosure score. Meanwhile, one-standard-deviation increase in ESG disclosure score is associated with 3.19-percentage-point increase in the probability of successful IPO. Our findings remain robust to instrumental variable regression, alternative language models, and alternative measures of ESG disclosure.
Cross-sectional evidence suggests that firms with lower likelihood of IPO success disclose more ESG-related information after 2018, a period when the capital market regulators paid more attention to a firm's ESG performance, and such disclosure improvement is more likely to increase the likelihood of IPO success during this period. In addition, our main findings are more pronounced for firms from highly polluting industries. Further analyses reveal that for firms with higher likelihood of IPO success, the ESG disclosure scores based on their prospectuses are positively associated with their post-IPO ESG performance, firms with lower likelihood of IPO success, the ESG disclosure scores based on their prospectuses are not significantly associated with their subsequent ESG performance. This pattern reveals a greenwashing risk and suggests that enhanced ESG disclosures among firms with lower likelihood of IPO success may reflect opportunistic presentation.
This study contributes to prior studies in three ways. First, this study extends the literature on information manipulation during the IPO process from financial packaging to the strategic presentation of non-financial information. Second, this study extends the literature on the determinants and consequences of ESG disclosure from the perspective of a firm's IPO motivation. Third, this study develops an LLM-based method to measure ESG disclosure. This is particularly important for firms that have not been covered by ESG rating agencies.
Our findings also have important practical implications: capital market regulators should conduct more substantive, risk-based verification of a firm's ESG claims, and strengthen IPO firms’ accountability for material misrepresentation of ESG information. Investors should maintain a cautious attitude towards the ESG-related disclosures by IPO firms with lower likelihood of IPO success.
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Received: 20 January 2026
Published: 17 September 2026
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