Identifying the Effect of Air Quality on Analysts' Forecasts

Abstract

The earnings forecasts of analysts who visit firms onsite could be affected by corporate local haze or by corporate risk exposures to pollution. This paper identifies whether analysts' earnings forecasts are driven by mood or risk exposure. By distinguishing analysts' online visits from site visits in China, we find that there is no statistically significant difference in effect of air quality between online and site groups, indicating a rejection of mood-driven channel. To address the endogeneity underlying, we use the COVID-19 pandemic as a natural experiment in which lockdowns randomly lead some analysts to visit firms online. The triple-difference model supports the interaction model. In contrast, we find strong effects of corporate risk exposure on analysts' earnings forecasts, which supports the risk-driven channel.

Keywords: risk exposures on pollution, Earnings forecasts, online visits, interaction model, triple-difference