The role of proximity in ESG related belief formation

Abstract: In this paper, I provide evidence that analysts disagree about the value impact of negative ESG events depending on whether the events are geographically close or far away. In particular, sell-side analysts from the country affected by an ESG incident are more likely to downgrade the firm, lower their cash flow expectations, and increase their discount rate.The effect lasts for up to a year and concentrates in hard-to-value firms. The evidence is consistent with personal experience influencing belief formation. I provide external validity showing that institutional investors from the affected country reduce their potfolio holdings compared to other institutions. The provided evidence has implications for the spatial distribution of negative ESG activities, as firms have an incentive to shift them to countries that are less represented in financial markets.