Toxic Expectations: Analyst Forecasts and Firm Pollution

Abstract

This research examines the association between analyst forecast bias and firm pollution from a behavioural perspective. Firm pollution may decrease future earnings through regulatory burdens or reduced demand from consumer backlash. I hypothesise that analysts overestimate pollution costs due to overweighting low-probability events, the availability bias, and the base rate fallacy. Using a sample of firms from the Toxic Release Inventory from 1987-2017, I find evidence of systematic pessimism in analyst forecasts of the upcoming annual earnings of polluting firms. 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.