Water risk and financial analysts' information environment: Empirical evidence from China

Abstract

AbstractWe examined the relationship between water risk and the information environment of financial analysts using data from Chinese listed companies from 2010 to 2020. We theorized that corporate water risk deteriorates analysts' information environment by affecting operational and financial uncertainty and corporate legitimacy. Specifically, we found that corporate water risk is associated with higher analyst forecast errors and analyst forecast dispersion and lower analyst following. This relationship weakens with corporate water information disclosure and strengthens with the environmental attention of local governments. Furthermore, we explored the impact of corporate water risk on financial risk and future financial performance and discovered that water risk increases corporate financial risk and reduces future earnings. This suggests that corporate nonfinancial risk may also include subtle financial risk, and current water risk has a certain predictive effect on future earnings, which is an interesting finding. Our results are robust to a range of tests, including instrumental variable, generalized method of moments estimates, propensity score matching, and alternative measures of analysts' information environment. Generally, our study provides insights into the complementary role of nonfinancial risks represented by water risk in understanding financial risk and has important implications for academia and practitioners in understanding the economic consequences of corporate water risk.