Asymmetric response to earnings news across different sentiment states: The role of cognitive dissonance |
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| Affiliation: | 1. School of Business, Central South University, Changsha, Hunan 410083, China;2. School of Finance, Shanghai Lixin University of Accounting and Finance, Shanghai 201209, China;3. Saunders College of Business, Rochester Institute of Technology, Rochester, NY 14623, USA;1. School of Business and Management, Shanghai International Studies University, 1550 Wenxiang Road, Shanghai 201620, China;2. SKEMA Business School, 99 Ren’ai Road, Suzhou 215123, China;3. School of Business, Nanjing University, 16 Jinyin St., Nanjing 210000, China;4. Li Anmin Institute of Economic Research, Liaoning University, 66 Chongshan Middle Road, Shenyang 110036, China;1. RB 239A, Department of Finance, College of Business Administration, Florida International University, Miami, FL 33199, United States of America;2. Finance and accounting Area, Indian Institute of Management, Indore, India;1. School of Business, University of Connecticut, 2100 Hillside Road, Storrs, CT 06269, United States of America;2. United States of America;3. Department of Economics and Finance, Robert C. Vackar College of Business & Entrepreneurship, University of Texas Rio Grande Valley, 1201 W University Dr, Edinburg, TX 78539, United States of America;4. Manning School of Business, University of Massachusetts Lowell, 72 University Avenue, MA 01854, United States of America |
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| Abstract: | Using the Chinese stock market data, we test the hypothesis that cognitive dissonance influences the stock market response to earnings news. Supporting this notion, we find that investors disregard earnings news that contradicts their sentiment due to cognitive dissonance, thereby causing a muted announcement date price reaction to such news. Further analysis shows that higher retail concentration and greater valuation uncertainty of the underlying firm exacerbate this cognitive dissonance and hence amplify its impact, but less credible financial report does not. Finally, we find that cognitive dissonance is temporary for bad news under optimism, but is quite persistent for good news under pessimism. Overall, our findings offer a behavioral bias explanation to understand why investors underuse accounting information. |
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