TheCorporateCounsel.net

Not sure if the sun’s shining where you are, but a forthcoming academic article purports to link exposure to sunshine to upwardly biased earnings forecasts. It’s not too surprising to hear of research linking sun exposure to good moods and according to this forthcoming article, it may be worthwhile to watch the weather forecast around the time when management prepares earnings forecasts. Here’s an excerpt from a Forbes article about the study:

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 corporation’s headquarters in the days preceding a management earnings forecast, and the extent to which that forecast exceeded the actual earnings reported by the company.

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.

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.

To avoid these negative biases and the risk of missing an overly optimistic forecast, the study’s authors say tying CEO and CFO bonuses to accurate earnings forecasts can help reduce the bias. They also say companies that have more analyst or media coverage are at reduced risk for overly rosy forecasts.

– Lynn Jokela