Investor Emotions and Earnings Announcements

TL;DR

This paper investigates how investor emotions expressed on social media before earnings announcements influence the actual earnings and market returns, revealing that heightened excitement often correlates with lower announcement returns.

Contribution

It introduces a novel analysis linking social media investor emotions to earnings outcomes and market reactions, emphasizing the significance of emotional content in financial decision-making.

Findings

Excitement correlates with lower announcement returns.

A one standard deviation increase in excitement leads to a 7.8 basis points decrease in returns.

Emotions significantly influence short-term market dynamics.

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 predicts 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 7.8 basis points lower announcement return, which translates into an approximately -5.8% annualized loss. 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.