The Impact of Equity Analysts on ESG Performance: Evidence from an Exogenous Shock

Abstract

This article investigates whether equity analysts promote or discourage environmental, social and governance (ESG) engagement by using an international sample of firms incorporated in 46 countries. To establish causality, we rely on two natural experiments, that is, brokerage mergers and closures, which generate an exogenous coverage termination. We find that the loss of an equity analyst results, on average, in an increase in the ESG score. This finding is consistent with the view that equity analysts exacerbate managerial myopia, encouraging listed firms’ managers to excessively focus on short-term outcomes. We also find that the impact of analyst loss on the ESG performance holds only for companies whose managers pay more attention to not miss earnings targets and for firms located in countries where the cultural orientation to long-term growth (rather than short-term results) is stronger. Finally, by decomposing the ESG score into its various sub-pillars, we observe that the impact of analyst loss is driven by the Environmental and Social dimensions, while no significant impact is found for the Governance dimension.