Accuracy in the Air: Pollution and Analyst Forecasts

53 Pages Posted: 9 Jan 2019 Last revised: 8 Feb 2019

See all articles by Dongmin Kong

Dongmin Kong

School of Finance, Zhongnan University of Economics and Law; Department of Finance, Huazhong University of Science and Technology

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Shasha Liu

School of Management, Jinan University

Yu-Jane Liu

Peking University - Guanghua School of Management

Date Written: December 27, 2018

Abstract

We investigate the causal impacts of air pollution on analyst forecast accuracy around earnings announcements. Using the air quality index in analyst workplaces, we provide direct evidence of the following. First, air pollution significantly reduces analysts’ earnings forecast accuracy in response to earnings announcements. Second, we introduce thermal inversion and wind force as instruments of air pollution to alleviate endogeneity, thereby establishing causality. Third, our findings are particularly pronounced in companies with more complications and for analysts who are younger, have lower levels of education, and are male. Furthermore, they are robust to alternative measures and different specifications. Overall, our findings contribute to the broader psychology and economics literature on the economic impacts of air pollution on analyst forecasts.

Keywords: Air Pollution; Analyst Forecasts; Earnings Announcements; Management Forecasts; Information Processing Abilities

JEL Classification: G02; G11; G14

Suggested Citation

Kong, Dongmin and Lin, Chen and Liu, Shasha and Liu, Yu-Jane, Accuracy in the Air: Pollution and Analyst Forecasts (December 27, 2018). Available at SSRN: https://ssrn.com/abstract=3306959 or http://dx.doi.org/10.2139/ssrn.3306959

Dongmin Kong (Contact Author)

School of Finance, Zhongnan University of Economics and Law ( email )

Wuhan, Hubei 430073
China

Department of Finance, Huazhong University of Science and Technology ( email )

Wuhan, Hubei 430074
China

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Shasha Liu

School of Management, Jinan University ( email )

No. 601, West Huangpu Road
Guangzhou, Guangdong 510632
China

Yu-Jane Liu

Peking University - Guanghua School of Management ( email )

Beijing
China

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