ESG news, future cash flows, and firm value

• Main Authors: DERRIN, Francois, KRUEGER, Philipp, LANDIER, Augustin, YAO, Tianhao
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2023
• Subjects: ESG; Sustainability; Expectations; Analyst forecasts; Valuation; Discount rate; Cost of capital; Cash flows; Business Law, Public Responsibility, and Ethics; Corporate Finance
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/7488; https://ink.library.smu.edu.sg/context/lkcsb_research/article/8487/viewcontent/SSRN_id3903274.pdf
• Institution: Singapore Management University

We investigate the expected consequences of negative ESG news on firms’ future profits. After learning about negative ESG news, analysts significantly downgrade their forecasts at short and longer horizons. Negative ESG news affect forecasts more strongly at longer horizons than other types of negative corporate news. The negative revisions of earnings forecasts following negative ESG news reflect expectations of lower future sales (rather than higher future costs). Quantitatively, forecast revisions can explain most of the negative impacts of ESG news on firm value. Analysts are correct to revise forecasts downward following negative ESG news and ESG sensitive analysts tend to provide more accurate forecasts.