The Heart of the Matter: How Emotions Guide Investors After a Negative Earnings Surprise

• In Event: Breakfast Research Forum

Abstract

In this study, I examine how two types of negative emotions, anger and fear, influence investor behavior after a negative earnings announcement. I find that anger and fear lead to very different information search and processing behaviors. Anger, while not impacting how much additional information an investor accesses, reduces how much time they spend reading materials and how deeply the information is processed. In contrast, fear leads to an increase in how much additional information is accessed, as well as increases the amount of time spent reading the materials; it also leads to better recall of that information. Results also show, contrary to theory, that anger causes investors to allocate less money to the firm that just announced negative earnings, whereas fear did not affect investment. Finally, my results show that an investor’s ability to manage his/her emotions can reduce the influence of anger on investment decisions. The results of this study extend the accounting and psychology literatures related to emotion, earnings announcements, management attributions, and emotional intelligence. My findings also have practical importance, suggesting that investors, managers, and regulators need to be aware that emotion can an arise due to the language used by managers to explain earnings performance. The positive takeaway is that emotionally intelligent investors can insulate themselves from the influence of anger.

Author

• Michael J. Wynes, Wilfrid Laurier University