Emotions and Managerial Judgment: Evidence from Sunshine Exposure

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