Robyn Rutgers ’24
Psychological research indicates that unpleasant weather may influence your physiological and psychological states, leading to pessimism, anxiety, and fatigue. In finance and economics, this weather-induced behavior can impact financial decisions and security prices. Dr. Danling Jiang, a professor of finance at Stony Brook University, studies the influence of psychology on financial markets. To evaluate the impact of experiencing unpleasant weather on immediate market responses, Jiang’s team measured weather conditions at the locations of institutional investors and market response time. Dr. Jiang and her colleagues hypothesized that unpleasant weather prior to market announcements correlates to slowed information processing, resulting in delayed reactions to such announcements.
To determine which weather was “unpleasant,” weather conditions were compared to the previous monthly averages from 1990 to 2016. Factors taken into consideration included cloud coverage, precipitation, and wind speed. Jiang’s team excluded extreme weather conditions, such as hurricanes and blizzards, to rule out the possibility that investors were unable to attend work. The researchers concluded that a one-standard-deviation increase in unpleasant weather prior to earnings announcements, the statements of a company’s profitability, led to a 10% smaller spread in announcement returns, changes in stock market prices. However, the same increase in unpleasant weather led to a 26% larger spread in post-earnings announcement drift, an anomaly in financial markets in which announcement returns do not reflect earnings announcements. Furthermore, Jiang’s team found that the effect of unpleasant weather on institutional investors was stronger for announcements made at the beginning or end of a month, when investors more actively trade and rebalance their portfolios. Additionally, a one-standard-deviation increase in unpleasant weather resulted in an 8% lower trading volume during the pre-announcement period. Jiang’s research provides evidence that unpleasant weather impedes information processing of institutional investors, amplifying market underreaction to earnings news and decreasing trading volume.
The findings of this study demonstrate the power of psychological biases and physiological constraints. Anyone, including institutional investors, can be susceptible to these influences while making decisions. By taking this effect into account, investors, moreover the general public, may be better prepared to avoid biased decision-making when the weather is cloudy, rainy, or windy.
 J. Danling, et al., Weather, institutional investors, and earnings news. Journal of Corporate Finance, Forthcoming 69, 1-20 (2021). doi: 10.1016/j.jcorpfin.2021.101990
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