Asymmetric Motivated Reasoning Among Long and Short Investors

43 Pages Posted: 12 Apr 2017 Last revised: 20 Nov 2018

See all articles by W. Brooke Elliott

W. Brooke Elliott

University of Illinois at Urbana-Champaign

Jessen L. Hobson

University of Illinois at Urbana-Champaign

Ben W. Van Landuyt

University of Arizona - Department of Accounting

Brian J. White

University of Texas at Austin - Department of Accounting

Date Written: November 19, 2018

Abstract

We extend research on investors’ motivated reasoning by examining how directional goals from holding a long or short position in a firm’s stock shape investors’ trading decisions. Results from laboratory markets suggest that traders holding a long position selectively overestimate the impact of transitory earnings on value when such items are prominently disclosed and are consistent with long traders’ incentivized directional preferences for higher earnings. By contrast, short traders do not exhibit motivated reasoning despite incentives that are symmetric with those of long traders. A follow-up study finds that a familiar contextual goal dampens the effect of a conflicting incentivized goal on judgments. Insofar as investors generally attune to a conventional preference for increasing market prices, this evidence provides a compelling explanation for asymmetric effects of directional goals on long and short traders’ decisions.

Keywords: earnings metrics, motivated reasoning, investors, short selling, earnings persistence

Suggested Citation

Elliott, W. Brooke and Hobson, Jessen L. and Van Landuyt, Ben W. and White, Brian J., Asymmetric Motivated Reasoning Among Long and Short Investors (November 19, 2018). Available at SSRN: https://ssrn.com/abstract=2950329 or http://dx.doi.org/10.2139/ssrn.2950329

W. Brooke Elliott

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Jessen L. Hobson

University of Illinois at Urbana-Champaign ( email )

4011 Business Instructional Facility
515 East Gregory Drive
Champaign, IL 61820
United States

Ben W. Van Landuyt

University of Arizona - Department of Accounting ( email )

Tucson, AZ 85721
United States

Brian J. White (Contact Author)

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States

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