Does media coverage of firms' environment, social, and governance (ESG) incidents affect analyst coverage and forecasts? A risk perspective

Abstract

We examine whether and how media coverage of firms' environment, social, and governance (ESG) incidents is associated with analyst coverage and forecasts. We propound that the risks of firms could either increase or decrease as a result of media-covered ESG incidents, depending on the firms' actions on the media coverage, and thus its impact on analyst coverage and forecasts would vary. Based on a sample of U.S. listed companies, we find evidence that the level of analyst coverage is negatively associated with a firm's ESG incidents covered by the media. This association is more pronounced for firms with more intense industrial product market competition, more severe ESG scandals, or coverage by less sophisticated analysts. We also find that the firms' ESG incidents covered by the media would lead to higher levels of forecast error and dispersion. Our mediation analysis further reveals that business risk and information risk tend to be higher for firms covered by the media for having been involved in ESG incidents, thereby explaining why the analysts' coverage and forecasts for these firms are adversely affected. Overall, our results highlight the importance of curbing corporate social irresponsibility and improving analyst performance in forecasting.