How Analysts Value ESG: An Empirical Analysis of the Impact of ESG Performance on the Price Target Bias

Abstract

This thesis examines how firm ESG performance and ESG reporting affect the price target bias, a normalized and directional measure of how analysts' price targets predict the market price. To examine this relationship, we employ a data panel of 24 367 firm-quarter observations between 2001 to 2021 on the companies on the S&P 500 index. We test for the effect of ESG performance, scoring, and reporting on the price target bias employing controls for risk, firm performance, the information environment, and analyst expectations. Using pooled OLS, we find ESG performance and the price target bias. Our results are driven by the Environmental and Social scores, while the Governance and Controversies scores mediate the price target bias. However, using within-estimators, we are not able to identify this relationship. We further test the interactive relationship between ESG performance and analyst following, finding that the BIAS of high ESG performers is less influenced by analyst following. We also find evidence for higher ESG performance for firms that issue ESG reporting and assure the reports. However, our results indicate that the ESG reporting does not influence the price target bias. Finally, using the within-estimator, we find that the price target bias is larger in the period after a firm receives an ESG score than before receiving the score. Our main results provide evidence for a positive relationship between the price target bias and ESG performance. Furthermore, testing the price target accuracy indicates this relationship corresponds to a worsening of price targets, where analysts value ESG performance too high relative to the market outcome.