Environmental Performance and Analyst Information Processing Costs
48 Pages Posted: 3 Sep 2016 Last revised: 20 Jun 2019
Date Written: August 31, 2016
This study tests the hypothesis that analyst information processing costs vary positively in the level of firms’ environmental performance ratings. Based on proxies for analyst information processing costs (e.g., the number of stocks followed, frequency and timeliness of earnings revisions, the accuracy of earnings forecasts), we find results to support this hypothesis. These findings deepen our knowledge of the informational setting that conditions analysts’ decisions by identifying the cost of processing environmental information as a potential determinant of the stocks analysts include in their portfolios. Our findings also have implications for capital market efficiency because the higher information processing costs induced by environmental performance ratings could discourage analysts from developing trading strategies to exploit asset mispricing.
Keywords: analyst earnings forecasts, analyst processing costs, environmental strengths and concerns, cost of socially responsible investing
JEL Classification: G14, M41, M45, K22
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