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Air pollution, affect, and forecasting bias: Evidence from Chinese financial analysts

Author

Listed:
  • Dong, Rui
  • Fisman, Raymond
  • Wang, Yongxiang
  • Xu, Nianhang
Abstract
We document a negative relation between air pollution during corporate site visits by investment analysts and subsequent earnings forecasts. After accounting for analyst, weather, and firm characteristics, an extreme worsening of air quality from “good/excellent” to “severely polluted” is associated with a more than 1 percentage point lower profit forecast, relative to realized profits. We explore heterogeneity in the pollution-forecast relation to understand better the underlying mechanism. Pollution only affects forecasts that are announced in the weeks immediately following a visit, indicating that mood likely plays a role, and the effect of pollution is less pronounced when analysts from different brokerages visit on the same date, suggesting a debiasing effect of multiple perspectives. Finally, there is suggestive evidence of adaptability to environmental circumstances – forecasts from analysts based in high pollution cities are relatively unaffected by site visit pollution.

Suggested Citation

  • Dong, Rui & Fisman, Raymond & Wang, Yongxiang & Xu, Nianhang, 2021. "Air pollution, affect, and forecasting bias: Evidence from Chinese financial analysts," Journal of Financial Economics, Elsevier, vol. 139(3), pages 971-984.
    • Handle: RePEc:eee:jfinec:v:139:y:2021:i:3:p:971-984
    DOI: 10.1016/j.jfineco.2019.12.004
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    More about this item

    Keywords

    Pollution; Forecasting bias; Investment analysts; Adaptation;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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