Emotions and Managerial Judgment: Evidence from Sunshine Exposure

Abstract

We 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 leads managers to make upwardly biased earnings forecasts. Importantly, our evidence implies that managers become less susceptible to the sunshine priming effect when the information environment is more certain, external monitoring is stricter, and managerial incentive structures are stronger. Additional results suggest that market participants are capable of unraveling sunshine-induced biased forecasts, and that managers who are 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. Our paper is the first large-scale study to document the nuanced ways in which emotions affect top executives.

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

JEL Classification: G02, G30, M40, M41