Accuracy in the Air: Pollution and Analyst Forecasts
53 Pages Posted: 9 Jan 2019 Last revised: 8 Feb 2019
Date Written: December 27, 2018
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: Suggested Citation