Bechetti, Ciriretti, and Giovannelli (2014)

Becchetti, Leonardo, Rocco Ciciretti, and Alessandro Giovannelli.  “Corporate Social Responsibility and Earnings Forecasting Unbiasedness.” Working paper (University of Rome “Tor Vergata”), 2014.

We investigate the relationship between corporate social responsibility (CSR) and I/B/E/S analysts’ earnings per share (EPS) forecasts using a large sample of US firms for 1992-2011. Based on literature findings, we decompose the CSR effect into four factors: accounting opacity, corporate governance, stakeholder risk, and overinvestment. We find that all of them significantly affect both the absolute forecast error on EPS and its standard deviation controlling for forecast horizon; number of analysts and forecasts; and year, in- dustry, and broker house effects. Consistently with our ex ante hypotheses, overinvestment, stakeholder risk, and accounting opacity have a positive effect, increasing both dependent variables, while corporate governance quality has a negative effect. A crucial aspect of our findings is that high CSR quality in terms of the four factors (i.e., accounting transparency, high corporate governance quality, stakeholder risk mitigation, and absence of overinvest- ment) contributes to making earnings forecasts unbiased as unbiasedness is generally met in the subsample of the top CSR quality companies and markedly violated in the subsample of the bottom CSR companies. We also document that overinvestment and stakeholder risk are sufficient to produce this effect.