Disclosure Standards and the Sensitivity of Returns to Mood
Review of Financial Studies (doi: 10.1093/rfs/hhv054)
64 Pages Posted: 21 Feb 2012 Last revised: 10 Sep 2015
Date Written: August 15, 2015
We provide evidence that higher-quality disclosure standards are associated with stock returns that are less sensitive to noise driven by investors’ moods. We identify return-mood sensitivity (RMS) based on the association between index returns and urban cloudiness, a source of short-term variation in mood. Based on a stylized model, we predict and find evidence consistent with higher-quality disclosure standards reducing RMS by tilting susceptible investors’ trades toward information and by facilitating sophisticated investors’ arbitrage. Our findings suggest that disclosure standards play an important role in enhancing price efficiency by reducing noise in returns, particularly noise related to investors’ short-term moods.
Keywords: Disclosure standards, Mood, Return noise, Susceptible investors
JEL Classification: G14, G15, M48
Suggested Citation: Suggested Citation