The nonlinear impact of firms' ESG disclosures on analysts' earnings forecast accuracy

The disclosure of environmental, social, and governance (ESG) information by firms can signal to the capital markets the potential sustainable development capabilities of the company and provide oversight to curb opportunistic management practices. However, the continuous disclosure of ESG information not only leads to excessive investment and increased operational risks but also contributes to information overload in the capital markets. We examine the impact of firms' ESG disclosures on analyst earnings forecast accuracy (AEFA) using a nonlinear approach to capture both sides of ESG effects. Our nonlinear findings suggest that ESG disclosure has a U-shaped effect on AEFA. Specifically, a firm's ESG disclosure enhances AEFA but at a decreasing rate. The favorable effect becomes smaller as firms disclose more ESG, and eventually, increases in ESG disclosure led to worsening AEFA. The conclusion remains unchanged after an array of robustness checks. The mechanism test reveals that earnings management and media attention mediate the U-shaped relation between ESG disclosure and AEFA. Additional analysis shows that the U-shaped relation is more salient for SOEs and non-polluting firms. The findings not only broaden the research on the impact of ESG disclosure on AEFA, but also help investors make sound investment decisions.