Does Climate Risk Influence Analyst Forecast Accuracy?

• In Event: 4.01. Effect of ESG Reporting on Investors and Analysts

Abstract

This paper examines the effect of climate risk on analyst forecast accuracy, proxied by forecast error and forecast dispersion. Using the country-level measure of forward-looking climate risk estimated with time trend in droughts based on the Palmer Drought Severity Index (PDSI), we find that analyst forecasts are less accurate when firms are located in countries with more vulnerability to droughts, especially when climate risks are acknowledged in analyst reports. We particularly attribute this increase in inaccuracy to a positive relation between climate risk and firms’ earnings volatility, complicating analysts’ forecasting tasks. Relatedly, we also find that the effect of climate risk on analyst forecast is more profound in industries vulnerable to climate change and heavily reliant on consumers’ choices. The relation is more prominent when analysts are less experienced, when firms are with low earnings quality, and when companies are located in more developed countries. Overall, our findings suggest that climate risk has noteworthy implications for analyst forecast accuracy.

Authors

• Ji woo Ryou, West Virginia University

• Inchel Kim, University of Texas Rio Grande Valley

• Suin Lee, University of Texas Rio Grande Valley