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Corporate sustainability and analysts' earnings forecast accuracy: Evidence from environmental, social and governance ratings

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  • Kun Luo
  • Sirui Wu

Abstract

We investigate the effect of corporate sustainability on analysts' forecast accuracy. Specifically, this paper documents how financial analysts respond to environmental, social and governance factors (hereinafter ESG) in earnings forecasts. Using a novel dataset from the Bloomberg ESG ratings, we find that ESG ratings increase analysts' forecast accuracy by reducing information risks and operation risks. The results are robust to a series of robustness checks, including propensity score matching, Heckman two‐stage estimation, staggered difference‐in‐differences (DID), placebo test, firm and year fixed effects and alternative proxies. The effect of ESG ratings on analysts' forecast accuracy is more pronounced for firms audited by accounting firms with low industry expertise and for firms tracked by analysts with low industry expertise. This paper responds to the calls for more research on ESG ratings and analysts' earnings forecast accuracy and provides implications that ESG assurance can effectively improve the quality of nonfinancial information of a company. In addition, the paper is valuable for policymakers to improve the ESG disclosure system.

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  • Kun Luo & Sirui Wu, 2022. "Corporate sustainability and analysts' earnings forecast accuracy: Evidence from environmental, social and governance ratings," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 29(5), pages 1465-1481, September.
    • Handle: RePEc:wly:corsem:v:29:y:2022:i:5:p:1465-1481
    DOI: 10.1002/csr.2284
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    3. Changjiang Zhang & Sihan Zhang & Yue Zhang & Yuqi Yang & Kai Lan, 2024. "Does Green Finance Policy Contribute to ESG Disclosure of Listed Companies? A Quasi-Natural Experiment from China," SAGE Open, , vol. 14(1), pages 21582440241, March.
    4. Manish Bansal, 2024. "Unpacking the drivers of earnings management in CSR firms: influence of investor risk perception," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 21(1), pages 127-142, March.
    5. Sana Ben Hassine & Claude Francoeur, 2024. "Do Corporate Ethics Enhance Financial Analysts’ Behavior and Performance?," JRFM, MDPI, vol. 17(9), pages 1-19, September.
    6. RareÅŸ HURGHIÅž, 2023. "Impact Of Esg Reporting On The Romanian Capital Market," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(25), pages 1-16.
    7. Xiao, Xiang & Ge, Ge & Yu, Ziqin, 2024. "Inhibition or inducement: ESG rating changes and earnings management – Based on the perspective of external supervision," Finance Research Letters, Elsevier, vol. 64(C).
    8. Chengyun Liu & Ziting Zhou & Kun Su & Ke Liu & Hui An, 2024. "Water risk and financial analysts' information environment: Empirical evidence from China," Business Strategy and the Environment, Wiley Blackwell, vol. 33(2), pages 1265-1304, February.
    9. Xiaoyu Cui & Baolei Qi & Muhammad Jameel Hussain, 2024. "Vendor sustainability performance and corporate customers' supplier selection," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(4), pages 2910-2928, July.
    10. Zhou, Mengling & Huang, Zizhen & Jiang, Kangqi, 2024. "Environmental, social, and governance performance and corporate debt maturity in China," International Review of Financial Analysis, Elsevier, vol. 95(PA).
    11. Jiang, Liqun & Chang, Zhongyuan & Yao, Wenxin & Huang, Leyi & Zhou, Shumei, 2024. "Transcend local for global: ESG as a legitimacy signal in the global expansion of emerging multinational enterprises," Finance Research Letters, Elsevier, vol. 69(PB).
    12. Yin, Zhujia & Deng, Rantian & Xia, Jiejin & Zhao, Lili, 2024. "Climate risk and corporate ESG performance: Evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 74(C).
    13. Qian, Shuitu & Yu, Wenzhe, 2024. "Green finance and environmental, social, and governance performance," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1185-1202.
    14. Xiangwei Xie & Hongyu Zhu & Jinjing Zhao, 2024. "How effective is digital transformation? Heterogeneous insights from listed companies’ ESG performance," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-15, December.
    15. Anrafel de Souza Barbosa & Maria Cristina Crispim & Luiz Bueno da Silva & Jonhatan Magno Norte da Silva & Aglaucibelly Maciel Barbosa & Sandra Naomi Morioka, 2024. "How can organizations measure the integration of environmental, social, and governance (ESG) criteria? Validation of an instrument using item response theory to capture workers' perception," Business Strategy and the Environment, Wiley Blackwell, vol. 33(4), pages 3607-3634, May.

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