Under the dome: Air pollution and analyst forecast optimism

Abstract

In this study, we investigate whether unpleasant mood caused by air pollution leads to lower analyst forecast optimism. Using a sample of 103,768 observations from 2014 to 2021, we show that there is a negative association between air pollution and analyst forecast optimism. Furthermore, we find that analysts become more optimistic forecasters after moving to a city with lower level of air pollution. Our results hold through various robustness tests including alternative measures of air pollution, controlling for various fixed effects, 2SLS by instrumenting for air pollution using thermal inversions and a placebo test by randomizing the headquarter locations of brokerage firms in our sample. Our paper provides plausibly causal evidence that air pollution lowers analyst forecast optimism.