Climate policy uncertainty and analyst forecast quality for greenhouse gas-intensive firms

This study examines the impact of climate policy uncertainty (CPU) on financial analysts' ability to forecast the performance of greenhouse-gas (GHG)-intensive firms. We measure CPU using the Gavriilidis (2021) CPU index, which we validate by confirming its correlation with climate-related legislative activities and its distinction from general economic uncertainty indices. Our findings reveal that CPU negatively impacts forecast quality, increasing dispersion and reducing accuracy, especially for long-term earnings forecasts. Political gridlock, characterized by a divided government and ideological polarization in Congress, mitigates the negative effects of CPU. Furthermore, GHG-intensive firms with higher-quality financial disclosures and those followed by more skilled analysts experience less deterioration in forecast quality due to CPU. Finally, GHG-intensive firms that increase climate-related discussions during earnings calls in periods of high CPU mitigate the adverse impact on forecast quality.