Investor Emotions and Earnings Announcements

Abstract

Armed with a decade of social media data, I explore the impact of investor emotions on earnings announcements. In particular, I test whether the emotional content of firm-specific messages posted on social media just prior to a firm's earnings announcement explains its earnings and announcement returns. I find that investors are typically excited about firms that end up exceeding expectations, yet their enthusiasm results in lower announcement returns. Specifically, a standard deviation increase in excitement is associated with an 8.9 basis points lower announcement return, which translates into an approximately 7.2% annualized loss. Motivated by this finding, I then construct a zero-cost portfolio leveraging social media emotions and opinions around earnings announcements, and show performance exceeding the market by a factor of 1.75 over the decade. My findings confirm that emotions and market dynamics are closely related and highlight the importance of considering investor emotions when assessing a firm's short-term value.