Air Pollution, Affect, and Forecasting Bias: Evidence from Chinese Financial Analysts

35 Pages Posted: 17 Jul 2019

See all articles by Rui Dong

Rui Dong

Renmin University of China - School of Business

Raymond J. Fisman

National Bureau of Economic Research (NBER); Boston University

Yongxiang Wang

University of Southern California - Marshall School of Business

Nianhang Xu

Renmin University of China - School of Business

Date Written: July 15, 2019

Abstract

We document a negative relation between air pollution during corporate site visits by investment analysts and subsequent earnings forecasts. After accounting for analyst, weather, and firm characteristics, an extreme worsening of air quality from “good/excellent” to “severely polluted” is associated with a more than 1 percentage point lower profit forecast, relative to realized profits. We explore heterogeneity in the pollution-forecast relation to understand better the underlying mechanism. Pollution only affects forecasts that are announced in the weeks immediately following a visit, indicating that mood likely plays a role, and the effect of pollution is less pronounced when analysts from different brokerages visit on the same date, suggesting a debiasing effect of multiple perspectives. Finally, there is suggestive evidence of adaptability to environmental circumstances – forecasts from analysts based in high pollution cities are relatively unaffected by site visit pollution.

Keywords: Pollution, Forecasting bias, Investment analysts, Adaptation

JEL Classification: D91, G41,Q5

Suggested Citation

Dong, Rui and Fisman, Raymond and Wang, Yongxiang and Xu, Nianhang, Air Pollution, Affect, and Forecasting Bias: Evidence from Chinese Financial Analysts (July 15, 2019). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3419885

Rui Dong

Renmin University of China - School of Business ( email )

Beijing
China

Raymond Fisman

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Yongxiang Wang

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Nianhang Xu (Contact Author)

Renmin University of China - School of Business ( email )

Beijing
China

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