Are Earnings Surprises Interpreted More Optimistically on Very Sunny Days? Behavioral Bias in Interpreting Accounting Information

Abstract

Using bootstrap randomization procedures, we find that market reactions to earnings surprises are higher when earnings are announced on very sunny days in New York City, The effect exists for firms traded in New York Stock Exchange (NYSE) and American Stock Exchange (AMEX) (i.e., New York-based exchanges), but does not exist for firms traded on NASDAQ (National Association of Securities Dealers Automated Quotation). Moreover, this sunshine effect is most (least) prominent for firms that are more likely to be followed by naive (sophisticated) investors. The sunshine effect is most prevalent on unambiguously sunny days, however, and is weaker on moderately sunny days. Average bid-ask spreads are lower on sunny days relative to cloudy days, suggesting that market-makers may contribute to the effect. Lastly, we find evidence of a short-term reversal of the sunshine-induced overreaction and underreaction.