ESG reports improve accuracy of analyst forecasts of financial performance

Takeaway: Environmental, social, and governance (ESG) reports complement financial reporting and lead to more accurate forecasts by financial analysts.

Suggested Audience: Investor relations executives and corporate citizenship professionals responsible for compiling nonfinancial reports

Researchers examined whether the disclosure of CSR-related information helps to improve the accuracy of the earnings forecasts of sell-side financial analysts. They looked at 7,108 stand-alone CSR reports published between 1994 and 2007, as well as financial and stock return data, and analyst forecast data. In addition, they measured firm and country stakeholder orientation and level of financial transparency/opaqueness.

Country stakeholder orientation measures:

• Legal environment in protecting labor rights and benefits
• Existence of CSR-related disclosure laws
• Level of public awareness of CSR issues based on the number of NGOs per million population, and the number of CSR reports published
• Surveys of the views of corporate executive officers on CSR activities.

Financial transparency measures:

• Firms -- Absolute value of expenses shifted to different reporting periods, averaged over the prior three years
• Countries -- Average rank score of the average country-level in Center for International Financial Analysis and Research (CIFAR) ratings for 1991, 1993, and 1995.

Key findings

• Investors from around the world, as represented by financial analysts, use CSR disclosure in forecasting future financial performance of firms.
• Issuance of stand-alone CSR reports is associated with lower analyst forecast error.
• In countries where CSR performance is more likely to affect firm financial performance due to a business culture where stakeholders have greater influence on firm operations and financial performance, the relationship between issuance of stand-alone CSR reports and lower analyst forecast error is stronger.
• CSR disclosure mitigates the negative effect of less financial transparency on forecast accuracy.
• CSR disclosure appears to accelerate the incorporation of future earnings information into the current stock price.

If citing, please refer to the original article, “Nonfinancial Disclosure and Analyst Forecast Accuracy: International Evidence on Corporate Social Responsibility Disclosure”, The Accounting Review, Vol. 87, No. 3, 2012, pp. 723–759, Dan S. Dhaliwal, Suresh Radhakrishnan, Albert Tsang and Yong George Yang