Earnings Metrics and Asymmetric Motivated Reasoning Among Long and Short Investors

45 Pages Posted: 12 Apr 2017 Last revised: 30 Jun 2019

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 - School of Accountancy

Brian J. White

University of Texas at Austin - Department of Accounting

Date Written: June 26, 2019

Abstract

In two studies, we extend research on boundedly rational investors’ use of earnings information. Study 1, a reanalysis of data from Elliott, Hobson and White’s (2015) laboratory markets, examines how directional goals from holding a long or short position in a firm’s stock interact with earnings presentation to give rise to motivated reasoning in investors’ trading decisions. Results indicate 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. This finding offers a new perspective on when and how long investors are likely to misinterpret earnings information. Unexpectedly, short traders do not exhibit motivated reasoning despite incentives that are symmetric with those of long traders. Study 2 utilizes a novel setting to test an explanation for this asymmetry between long and short investors’ reasoning processes. We find 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 investors’ judgments and 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., Earnings Metrics and Asymmetric Motivated Reasoning Among Long and Short Investors (June 26, 2019). 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 - School of Accountancy ( 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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