Climate Change, Analyst Forecasts, and Market Behavior

Abstract

This study examines whether sell-side equity analysts help the market assimilate information contained in global climate change. Using a new measure of firm sensitivity to climate change, we show that analysts located in states where firms exhibit greater sensitivity to abnormal temperature changes issue relatively less optimistic and more accurate forecasts in periods following large temperature increases. These effects are stronger for firms that are more sensitive to temperature changes. High temperature sensitivity firms also have lower consensus forecasts and higher earnings surprises, which generate higher stock market reaction following earnings announcements. Collectively, the evidence suggests that certain sell-side equity analysts incorporate news about climate change in their earnings forecasts and, consequently, earnings information is incorporated into prices quicker.