Emotions and Managerial Judgment: Evidence from Sunshine Exposure

The Accounting Review, Forthcoming

61 Pages Posted: 25 May 2017 Last revised: 5 May 2021

See all articles by Chen Chen

Chen Chen

Monash University - Department of Accounting

Yangyang Chen

City University of Hong Kong (CityUHK) - Department of Accountancy

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Edward Podolski

Deakin University; Financial Research Network (FIRN)

Madhu Veeraraghavan

T.A. PAI Management Institute, Finance Area; T A Pai Management Institute, Manipal

Date Written: April 24, 2021

Abstract

We examine the role and economic consequences of emotions in shaping the judgment of corporate executives. Analyzing a large sample of U.S. public firms, we find that sunshine-induced good mood leads managers to make upwardly biased earnings forecasts. Importantly, our evidence implies that managers become less susceptible to the sunshine priming effect in unambiguous settings, when their forecasts are subject to stricter external monitoring, and when they have stronger incentives to issue accurate forecasts. Additional tests show that equity market participants discern less informative signals from forecasts influenced by sunshine and that managers prone to the sunshine priming effect impose costs on their firms in the form of higher information risk and equity financing costs. Reflecting that labor markets also play a disciplinary role, we find that mood prone managers suffer adverse career outcomes. We provide the first large-scale analysis on the nuanced ways in which emotions affect top executives.

Keywords: Weather-induced mood; Optimism; Management earnings forecasts

JEL Classification: G02, G30, M40, M41

Suggested Citation

Chen, Chen and Chen, Yangyang and Pittman, Jeffrey A. and Podolski, Edward and Veeraraghavan, Madhu, Emotions and Managerial Judgment: Evidence from Sunshine Exposure (April 24, 2021). The Accounting Review, Forthcoming , Available at SSRN: https://ssrn.com/abstract=2973184 or http://dx.doi.org/10.2139/ssrn.2973184

Chen Chen

Monash University - Department of Accounting ( email )

Building H, Level 3
Caulfield campus
Melbourne, Victoria 3800
Australia

Yangyang Chen (Contact Author)

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Jeffrey A. Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

Edward Podolski

Deakin University ( email )

221 Burwood Highway
Burwood, Victoria 3125
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Madhu Veeraraghavan

T.A. PAI Management Institute, Finance Area ( email )

Bangalore
Manipal, Karnataka 576104
India
+91-820-2701030 (Phone)

T A Pai Management Institute, Manipal ( email )

TAPMI Canpus
Manipal
Manipal, Manipal 576104
India
+91-820-2701020 (Phone)

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