How Do You Really Feel?: Two Experiments on the Impact of Affect on Investor Judgment and Decision Making

Abstract

The purpose of this thesis is to understand how investor judgments and decisions around an earnings announcement are influenced by affect. In the first study, I examine the impact of unrelated tweets on investor judgments when they receive a positive earnings announcement through Twitter. I find that both negative and positive affect elicited by posts in an investor’s Twitter feed unrelated to the investment results in investment attractiveness judgments that are lower than when unrelated tweets are neutral in tone. I find that a warning from the SEC about the impact of these irrelevant Twitter posts helps to reduce the influence of only negative incidental affect. Further analysis reveals that an investor’s ability to understand the cause and effect relationship of emotions achieves a similar debiasing result. In the second study, I examine how two types of negative affect, 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 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. Together, these studies extend the accounting and psychology literatures related to affect, earnings announcements, social media, attributions, and emotional intelligence. My findings have practical importance, suggesting that investors, managers, and regulators need to be aware that affect can arise due to the channel used to disseminate earnings and the language used by managers to explain earnings performance. The positive takeaway is that emotionally intelligent investors can insulate themselves from the influence of affect.