Research

Reminder That it's a Short Week This Week - Oct 13, 2009 7:54:25 AM

17. Financial Analysts' Response to the revelation of ESG-related misconduct of their brokerage houses (with Hui Grace Wang, Yaxin Wen, and Luo Zuo) New draft on SSRN soon!

We study how employees respond when their employers’ negative ESG incidents are revealed to market participants. Using the setting of financial analysts and brokerage houses, we find that following negative ESG news, analysts provide higher quality research by producing more accurate earnings forecasts and reliable stock recommendations. This improvement is mostly driven by analysts dialing down previous overly optimistic assessments, and it is absent when their prior assessments are relatively pessimistic. Analysts largely stay with their employing brokers confronted by ESG incidents; among the ones leaving to join other brokers, we do not observe a significant improvement of their research quality at the new jobs. Our results highlight that the revelation of brokers’ negative ESG profile has a silver lining: it improves analysts’ research and alleviates potentially biased assessments. Because ESG constitutes an important part of firms’ intangible assets, our study has broader implication on how employees react to negative events affecting the value of  intangible assets.