The Neuroscience Behind the Stock Market's Reaction to Corporate Earnings News

36 Pages Posted: 15 Aug 2012  

Jan Barton

Emory University

Gregory Berns

Emory University

Andrew Brooks

Emory University

Date Written: August 13, 2012

Abstract

Using functional magnetic resonance imaging, we capture neural activity in the ventral striatum — a key area in the human brain’s reward processing circuit — of 35 adult investors learning the earnings per share disclosed by 60 publicly traded companies. Before imaging, investors forecasted each company’s earnings and took either a long or a short position in its stock. We find that striatal activation in investors’ brains explains just as much or more of the variation in risk-adjusted stock returns and abnormal share trading around earnings announcements than the dollar or percentage magnitude of the earnings surprise itself. We also find that, in aggregating investors’ individual reactions, the market seems to weigh more heavily the reactions of investors with greater brain activation, even after controlling for their financial expertise, forecasting ability, investment positions, and overall sensitivity to rewards and punishment.

Keywords: financial accounting, earnings surprise, market reaction, human brain, neuroeconomics, neuroaccounting, fMRI

JEL Classification: M4, G1

Suggested Citation

Barton, Jan and Berns, Gregory and Brooks, Andrew, The Neuroscience Behind the Stock Market's Reaction to Corporate Earnings News (August 13, 2012). Available at SSRN: https://ssrn.com/abstract=2129422 or http://dx.doi.org/10.2139/ssrn.2129422

Jan Barton (Contact Author)

Emory University ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States
404-727-6398 (Phone)
404-727-6313 (Fax)

Gregory Berns

Emory University ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

Andrew Brooks

Emory University ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

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