ESG scores and arbitrage opportunities in rights issues: Evidence from international equity markets

Abstract

This study examines the extent to which Environmental, Social, and Governance (ESG) performance influences the emergence of arbitrage opportunities in rights-based equity offerings, starting with the idea that firms with stronger sustainability indicators might display greater pricing efficiency. Using a sample of 258 rights issues conducted between 2000 and 2023 in 41 countries, we identify arbitrage conditions through a trading strategy that compares the theoretical and market price of shares acquired via subscription rights. We complement this analysis with OLS, logit, and probit estimations to evaluate whether ESG scores - interpreted as quantitative measures of firms’ sustainability practices - help explain the probability of these market anomalies arising. The results show a positive and statistically significant association between ESG scores and the likelihood of arbitrage, contrary to the usual expectation that higher ESG performance enhances market efficiency. Further, Granger causality tests provide complementary evidence that variations in ESG scores may precede the emergence of these anomalies. These results suggest that firms with stronger ESG profiles may experience temporary overvaluation during rights offerings, limiting the market’s ability to immediately absorb price discrepancies. This study provides one of the first empirical assessments linking sustainability metrics to pricing inefficiencies in rights offerings, highlighting the need for deeper analysis of how ESG information interacts with market-pricing mechanisms. To the best of the authors’ knowledge, this is one of the few articles that examines the emergence of arbitrage opportunities in equity offerings with subscription rights, and the first to introduce sustainability factors as an explanatory variable for those market anomalies