This study tests the hypothesis that analyst information processing costs vary positively in the level of firms’ environmental performance ratings. Based on proxies for analyst information processing costs (e.g., the number of stocks followed, frequency and timeliness of earnings revisions, the accuracy of earnings forecasts), we find results to support this hypothesis.

These findings deepen our knowledge of the informational setting that conditions analysts’ decisions by identifying the cost of processing environmental information as a potential determinant of the stocks analysts include in their portfolios. Our findings also have implications for capital market efficiency because the higher information processing costs induced by environmental performance ratings could discourage analysts from developing trading strategies to exploit asset mispricing.

By: Paul A. Griffin, University of California, Davis – Graduate School of Management, Thaddeus Neururer, University of Connecticut – School of Business, and Estelle Sun, Boston University – Questrom School of Business

You can read the SSRN article here