Emotions and Managerial Judgment: Evidence from Sunshine Exposure

92 Pages Posted: 25 May 2017 Last revised: 22 Mar 2019

See all articles by Chen Chen

Chen Chen

Monash University - Department of Accounting

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business

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

Date Written: March 19, 2019

Abstract

We comprehensively examine the role and economic consequences of emotions in influencing the judgment of corporate executives. Analyzing a large sample of U.S. public firms, we find that sunshine-induced good mood entices managers to make upwardly biased voluntary earnings forecasts. This effect is most pronounced in ambiguous settings, when external managerial scrutiny is milder, and when incentives to provide accurate forecasts are weaker. Additional tests reveal that investors are aware of the phenomena and discount forecasts made by managers who are likely to be in a good mood. Our analysis also shows that firms with managers who are excessively sensitive to the sunshine priming effect have higher information risk and cost of equity capital, and that these managers endure poorer career prospects. We provide the first large-scale evidence on the role that emotions play in the judgment formation of top executives at U.S. public firms, the forces that constrain the impact of their emotions, and the economic implications stemming from emotionally biased managerial judgment.

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 (March 19, 2019). 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)

Hong Kong Polytechnic University - Faculty of Business ( email )

9/F, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hong Kong, Hung Hom, Kowloon M923
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)

Register to save articles to
your library

Register

Paper statistics

Downloads
279
Abstract Views
1,325
rank
107,567
PlumX Metrics