Knowledge that Transforms

Do industries use advertising strategically when subject to the threat of political costs? Communication via advertising can assuage public concerns, which, in turn, reduces the incentives for elected officials to impose regulations on the industry. We identify expected political costs using cases of repeated industry testimony at congressional hearings. To disentangle strategic advertising in response to the threat of political costs from advertising for other reasons (e.g., reputation building or to generate sales), we exploit the fact that only politicians overseeing industry-relevant hearings can impose costs on a given industry. We find that subsequent to these hearings, affected industries increase their advertising by 132% more in the electorates of the politicians overseeing the hearings, relative to the increase in the electorates of other politicians. The strategic increase in advertising is magnified in the electorates served by the most senior politicians on the committees and those with the most politically engaged citizens. The increase is also pronounced in election years, when the hearings are longer, contain more negative language, or include a higher proportion of legislation-related words. Moreover, our results are not driven by politicians’ decisions to serve on committees relevant to their local-area firms. In sum, our findings provide novel evidence about corporate communication with non-investor stakeholders.

Financial analysts closely follow a firm’s operations and assess the risks that it faces. In this paper, we examine whether analysts incorporate ESG risks into their stock recommendations and target prices. Specifically, we use a unique firm-day level dataset on negative ESG risk incidents to proxy for unobservable risk assessments of analysts. We find that analyst outputs predict future ESG incidents, suggesting that analysts incorporate ESG risks into their models. Our results are robust to controlling for ESG incidents that firms experienced in the past, and are stronger in more transparent information environments, and in the presence of more guidance on ESG issues from the Sustainability Accounting Standards Board. Importantly, we find that analysts incorporate ESG risks through adjusting discount rates rather than cash flow estimates. Overall, our results highlight the ability of financial analysts to synthesize and integrate ESG risks into their research.