Does Exposure To More Sunshine Affect Managers Decisions?
A sunshine-induced good mood leads managers to make upwardly biased earnings forecasts. getty  A sunshine-induced good mood leads managers to make upwardly biased earnings forecasts, according to a study forthcoming in The Accounting Review. In an article titled Emotions and Managerial Judgment: Evidence from Sunshine Exposure researchers analyzed the relation between the amount of sunshine around a corporations headquarters in the days preceding a management earnings forecast, and the extent to which that forecast exceeded the actual earnings reported by the company. The article is authored by Chen Chen of Monash University, Yangyang Chen from City University of Hong Kong, Jeffrey Pittman of Memorial University and Virginia Tech, Edward Podolski from Deakin University, and Madhu Veeraraghavan of TA PAI Management Institute. In the article, the researchers describe how prior research has linked sunshine exposure to good moods and higher expectations about future outcomes. As such, the study tests the notion that greater pre-forecast sunshine exposure leads managers to issue overly optimistic earnings forecasts. Specifically, the researchers measure the amount of sun exposure around the corporate headquarters during the 14 days preceding the management forecast. The initial motivation of the study stems from prior research in neurobiology that finds that sunshine is strongly related to individuals moods. It follows that if managerial emotions shape their judgment about the future performance of the firm, public disclosures relating to earnings forecasts could hinge on sunshine conditions, says Pittman. Using a sample of 29,912 annual earnings forecasts from U.S. publicly traded companies between 1994 and 2010, the study reports a positive relation between sun exposure in the days preceding a forecast and the extent to which that forecast exceeds the earnings later reported by the company. The study controls for a host of other weather-related variables, like temperature and precipitation and finds that none of these other weather-related factors bias forecasts. Using data related to CEO golfing and other leisure activities, the study performs a battery of tests to demonstrate that good moods in the office are more likely driving the effect versus more leisure time away from the office on sunny days. Interestingly, the study reports that CEOs are no more likely to golf during periods of sunshine versus cloudy days. Given the presence of this sunshine-induced bias, the study goes on to examine factors that might curtail it. We analyzed whether the importance of fleeting emotions to corporate disclosures is uniform across all managers, or whether managers working in certain environments or contexts are more or less affected by sunshine-induced mood, describes Pittman. The researchers report that the bias is less pronounced in several settings, including when the company has more analyst or media coverage and when CEO and CFO bonuses are more tied to accurate earnings forecasts. The sunshine effect entirely vanishes in certain situations like when managers have strong monetary incentives to make accurate forecasts or when they are subject to stringent oversight by institutional investors or the news media. Rather than emotions inevitably seeping into corporate decision-making and disclosure practices, external discipline can reduce or even eradicate its impact, reports Pittman. The study wraps up by examining the consequences to CEOs whose management is more prone to the sunshine bias. The researchers observe that these CEOs pay a price in the form of shorter tenures, lower compensation, and fewer CEO appointments. Pittman concludes that, strong oversight of managerial activities is necessary to ensure that emotional states do not materially distort corporate disclosures. Importantly, our study identifies a potential factor that could undermine the quality of public disclosures, while also highlighting the settings in which such risks are exacerbated. Boards, when developing corporate governance structures, may want to focus intently on settings in which emotions play a role in influencing managerial disclosures. More broadly, our research alerts investors to take into account the likely mood of managers when interpreting their public disclosures.