Toxic Expectations: Analyst Forecasts and Firm Pollution
60 Pages Posted: 12 Nov 2019 Last revised: 13 Jan 2020
Date Written: October 31, 2019
This research examines the association between analyst forecast bias and firm pollution from a behavioural perspective. Using a sample of firms in the Toxic Release Inventory (TRI) from 1987-2017, I find evidence of systematic analyst pessimism in forecasts of the upcoming annual earnings of polluting firms. Analyst pessimism for polluters is consistent with behavioural theories on overweighting low-probability events, the availability bias, and the base rate fallacy. I also test whether individual analysts display persistent forecast errors for polluters in accordance with the conservatism bias. Results indicate that pessimistic and optimistic analysts are persistently biased towards polluters, despite having been proven wrong in recent forecasts. Although results depict systematic analyst pessimism for polluters, I find no evidence of any abnormal polluter returns around their earnings announcement dates.
Keywords: ESG, behavioural finance, analyst forecast bias, pollution, behavioural economics, behavioral finance, behavioral economics, earnings surprise, equity research
JEL Classification: G02, G14
Suggested Citation: Suggested Citation