This study examines whether financial analysts function as information intermediaries by incorporating Toxics Release Inventory (TRI) data into their assessments of firms' environmental risks, as reflected in earnings forecasts and stock recommendations. It further investigates whether analysts' forecast and recommendation revisions influence subsequent corporate environmental performance, thereby providing evidence on the effectiveness of the Environmental Protection Agency's (EPA's) market-based regulatory approach.
Using a longitudinal sample of US publicly listed firms from 1997 to 2011, the study analyzes how financial analysts utilize TRI data in their decision-making processes. An event-study methodology is employed to examine how the EPA's annual public release of TRI data affects analysts' forecast accuracy and dispersion. The analysis also examines the economic implications of analysts' forecast and recommendation revisions for firms' future toxic emissions. Robustness tests are conducted using alternative environmental risk measures and industry-level analyses.
The results indicate that higher pollution propensity is associated with greater forecast errors and increased dispersion among analysts. Analysts respond to increases in pollution propensity by revising earnings forecasts and stock recommendations downward, and they revise them upward when pollution propensity declines. Importantly, these analyst responses are predictive of subsequent reductions in firms' toxic emissions, suggesting that analyst activity can exert real effects on corporate environmental behavior. Overall, the findings support the role of TRI disclosures in facilitating market-based discipline.
The study is limited to US firms and TRI data up to 2011. Future research could investigate other forms of noncorporate disclosure and verifiable pollution data in global contexts to enhance the generalizability of the findings.
The study provides empirical support for the EPA's use of TRI disclosures as a mechanism to encourage environmental improvements through capital-market pressure. Policymakers and standard setters may further enhance the effectiveness of such disclosures by requiring more detailed and standardized environmental information in firms' management's discussion and analysis (MD&A), thereby enabling analysts to better identify and price environmental risks.
By demonstrating that financial analysts incorporate TRI disclosures in ways that can shape firms' environmental behavior, the study underscores the social importance of public transparency in holding polluters accountable. Analysts' forecast revisions and stock recommendations can trigger market responses that incentivize greater corporate eco-efficiency, resulting in lower toxic emissions and improved environmental quality, thereby benefiting affected communities and reinforcing corporate environmental responsibility.
This study offers novel evidence that financial analysts incorporate nonfinancial, noncorporate TRI data into their analyses, highlighting their role as information intermediaries in an environmental reporting context. It demonstrates that analysts are able to parse the uncertainty inherent in TRI data and translate environmental risk into financial outcomes through earnings forecast and stock recommendation revisions. Additionally, the study documents tangible effects of analyst behavior on firms' pollution abatement efforts, contributing to the literature on environmental accounting, analyst behavior and market-based regulation, with important policy implications.
