Sleep Disruption and Investor Processing of Earnings News: Evidence from Daylight Saving Time Advances
55 Pages Posted: 25 Jan 2021 Last revised: 30 Jan 2021
Date Written: January 29, 2021
Despite extensive evidence on the effects of psychological and behavioral factors on investors’ processing of accounting information, little is known about how physiological factors affect the investor response to accounting disclosures. Research in neuroscience suggests that sleep disruptions can have profound physiological effects that impair cognition. Motivated by this evidence, we use “spring forward” Daylight Saving Time (DST) phase advances, which have been shown to inhibit cognitive function by disrupting the human sleep cycle and circadian rhythm, to examine the effect of sleep disruption on investors’ reactions to earnings news. We find consistent evidence of a muted reaction to earnings news released during the week following a DST advance. We also find that this effect is stronger when investors are more likely to be trading on earnings news. We find no evidence of a decrease in EDGAR downloads or media attention during this period, suggesting that DST advances affect investors’ information integration, rather than information acquisition. Our inferences are strengthened through a placebo test performed during the previous (i.e., pre-2007) DST phasing regime, and through alternative design choices and robustness tests. Overall, our findings suggest that sleep disruptions affect investors’ ability to integrate value-relevant earnings news into their trading decisions. Our study provides insight into the costs of sleep inadequacy, which has been declared a public health epidemic and is prevalent among professional investors, and informs ongoing policy debates regarding the abolishment of DST phasing.
Keywords: Disclosure Processing, Earnings Response, Sleep Disruption, Daylight Saving Time
JEL Classification: G14, G41, M41
Suggested Citation: Suggested Citation