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

See all articles by Brian J. Bushee

Brian J. Bushee

University of Pennsylvania - The Wharton School

Henry L. Friedman

University of California, Los Angeles (UCLA) - Accounting Area

Date Written: August 15, 2015

Abstract

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

Bushee, Brian J. and Friedman, Henry L., Disclosure Standards and the Sensitivity of Returns to Mood (August 15, 2015). Review of Financial Studies (doi: 10.1093/rfs/hhv054) . Available at SSRN: https://ssrn.com/abstract=2007289 or http://dx.doi.org/10.2139/ssrn.2007289

Brian J. Bushee

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-4872 (Phone)
215-573-2054 (Fax)

Henry L. Friedman (Contact Author)

University of California, Los Angeles (UCLA) - Accounting Area ( email )

D406 Anderson Complex
Los Angeles, CA 90095-1481
United States

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