Earnings Disclosures and Investor Judgments: The Joint Effect of Incidental Affect and Emotion-Understanding Ability*

Abstract

This study uses an experiment to investigate the influence of investors' irrelevant feelings (e.g., positive vs. negative) on their financial judgments, with a specific focus on the role that emotion-understanding ability plays in mitigating their biases. The participants in the experiment were exposed to emotionally charged social media posts before a positive earnings announcement was made by a company in which they had invested. The results indicate that investors with lower emotion-understanding ability displayed biased judgments influenced by their feelings that were evoked by irrelevant content. Notably, the findings show that the negative and positive feelings elicited by irrelevant information led to lower investor judgments. Conversely, those with higher emotion-understanding ability were able to resist these biases, focusing on the relevant information. This research underscores the critical role of emotional intelligence in financial decision-making and highlights how investors' feelings can inadvertently distort their perceptions, particularly in environments saturated with irrelevant, emotionally charged information, such as social media.