Doing good in periods of high uncertainty: Economic policy uncertainty, corporate social responsibility, and analyst forecast error

Abstract

We investigate the behavior of analyst earnings forecast error in response to policy uncertainty. We find that the accuracy of analyst forecasts is compromised at times of increased economic policy uncertainty, when market volatility and information opacity are high. This negative association between policy uncertainty and earnings forecast accuracy is alleviated in firms where good CSR practices are in place. The disclosure of CSR-related nonfinancial information reportedly improves forecast accuracy; in the context of policy uncertainty, we document that CSR plays a stabilizing role by moderating analyst forecast error. Additionally, we report that the moderating effect of CSR is more pronounced in domestic rather than multinational firms, where, for the former, analysts are able to better assess the quality of information. Finally, we observe that analysts attach more value to the external legitimacy aspect of CSR rather than internal sustainability in guaranteeing earnings resilience in the face of high policy uncertainty. Our results remain valid in various robustness settings. © 2021