What Drives Beliefs about Climate Risks? Evidence from Financial Analysts

Abstract

This paper examines how exposure to extreme weather events affects earnings forecasts of equity analysts, using a unique dataset that matches natural disasters with the location of analysts across the US over 2000-2020. I find that analysts’ earnings forecasts become more accurate after they experience an extreme weather event. This effect persists up to 1.5 years and is more pronounced for firms with high climate risks, greater asymmetric information, and for analysts who are more experienced. These results indicate that weather events prompt analysts to rationally acquire and incorporate more information into their forecasts. In aggregate, this information acquisition process does not spill over to analysts distant from the event and prices do not react to analysts revising their forecasts after the event. However, I observe that brokerage firms capitalize on this increased analyst accuracy by expanding coverage of stocks that are particularly sensitive to climate risks. 

Keywords: Belief Formation, Climate Risks, Physical Risks, Analysts Forecasts

JEL Classification: G1, G2, G3, Q5, Q54