Epidemic experience, analyst sentiment, and earnings forecasts: Evidence from SARS exposure

Abstract

This study examines whether exposure to dangerous infectious diseases affects how analysts assess risks. We use the outbreaks of the severe acute respiratory syndrome (SARS) at analysts' previous office locations across China as a plausibly exogenous shock in the analysts' life experience. We show that compared to their less-affected counterparts, analysts in provinces with more SARS cases issue more optimistic forecasts for firms. This effect is stronger for affected analysts in provinces perceived as more salient during the SARS epidemic period. Mechanism tests show a high level of unexpected economic growth and positive media reports can motivate optimistic forecast bias induced by SARS exposure. Further heterogeneity tests indicate that our findings are particularly pronounced among busier analysts, those with less industry specialization, and female analysts. Overall, these findings suggest that exposure to the SARS epidemic influences the information intermediaries’ judgment.