Professional Documents
Culture Documents
Ed deHaan
University of Washington
Joshua Madsen
University of Minnesota
Joseph D. Piotroski
Stanford University
We investigate whether unpleasant environmental conditions affect stock market participants responses
to information events. We draw from psychology research to develop a new prediction that weather-
induced negative moods reduce market participants activity levels. Exploiting geographic variation in
equity analysts locations, we find compelling evidence that analysts experiencing unpleasant weather are
slower or less likely to respond to an earnings announcement relative to analysts responding to the same
announcement but experiencing pleasant weather. Price association tests find evidence consistent with
reduced activity due to weather-induced moods delaying equilibrium price adjustments following
earnings announcements. We also use our analyst-based research design to re-examine an existing
prediction that unpleasant weather induces investor pessimism, and find evidence of both analyst
pessimism and reduced activity in the presence of unpleasant weather. Together, our study provides new
evidence that both extends and reaffirms findings of a relation between unpleasant weather and market
activities, and contributes to the broader psychology and economics literature on the impact of weather-
induced mood on labor productivity.
*
Accepted by Philip Berger. We thank Stephanie Grant, Henry Friedman, David Hirshleifer, Christian Leuz, Ryan
McDonough, Siew Hong Teoh, Joanna Wu, Li Zhang, an anonymous referee, and workshop participants at
University of Chicago, London Business School, University of Michigan, University of Minnesota, Rutgers
University, MIT, Stanford University, University of Pennsylvania, University of Utah, University of Washington,
Washington University, and FARS 2016 midyear meeting for valuable comments and suggestions. We are sincerely
grateful to Sue Barnstable, Mae Bethel, Su Elliot, John Johnson, and Stanford GSB CIRCLE for research support.
Financial support was provided by the Stanford University Graduate School of Business, University of Washington
Foster School of Business, and the University of Minnesota Carlson School of Management. An Online Appendix to
this paper can be downloaded at http://research.chicagobooth.edu/arc/journal-of-accounting-research/online-
supplements.
1. Introduction
The notion that unpleasant weather affects individuals moods and behaviors has existed for
centuries. However, rigorous studies of weather-induced moods and economic activities find mixed
results, and are especially limited with regards to the professional activities of agents with strong
incentives to avoid biases. 2 This paper investigates the relationship between unpleasant weather, mood,
and worker productivity. Specifically, we examine whether weather-induced negative moods impair
Our empirical analysis examines how local weather conditions affect geographically dispersed
equity analysts responses to earnings announcements. This setting has several advantageous features.
First, earnings announcements are pre-scheduled, well-defined events, during which analysts have salient
incentives to update their forecasts and recommendations in a timely manner. Second, earnings
announcements are a setting where professionals across the U.S. simultaneously perform the same task
using similar inputs. Third, we can quantify the accuracy and biases in analysts forecasts, and the speed
with which they perform their tasks. Fourth, a large panel dataset allows us to exploit both within-
announcement and across-time variation to identify likely causal effects of weather on work output.
broadly (Bradshaw [2011]; Richardson, Tuna, and Wysocki [2010]), so finding evidence that unpleasant
weather affects analysts behaviors is likely informative about the effects of unpleasant weather on
1
The date of the quote attributed to Voltaires letters is unknown but was referenced as early as 1887 by Thomas
North in Storm-effects on mentality (The North American Review, volume 144, p427).
2
Several prior studies find evidence consistent with weather affecting individuals mood, economic decisions,
and/or activities (Cunningham [1979]; Coleman and Schaefer [1990]; Smith and Bradley [1994]; Tietjen and Kripke
[1994]; Markham and Markham [2005]; Connolly [2008]; De Silva, Pownall, and Wolk [2012]; Bassi, Colacito, and
Fulghieri [2013]; Busse, Pope, Pope, and Silva-Risso [2014]; Lamare [2013]; Goetzmann, Kim, Kumar, and Wang
[2015]). However, other studies fail to find similar weather-induced mood effects (Sanders and Brizzolara [1982];
Clark and Watson [1988]; Denissen, Butalid, Penke, and van Aken [2008]; Lucas and Lawless [2013]). These mixed
findings are possibly due to small sample sizes, limited sample periods, and/or self-reported emotional conditions
(Keller, Fredrickson, Ybarra, Ct, Johnson, Mikels, Conway, and Wager [2005]).
1
investors and other market participants. 3 Thus, our analyst-based research design in many ways
related task while experiencing randomly assigned weather. A drawback of our archival approach is that
we cannot directly measure analysts emotional states and, therefore, we rely on control variables and
robustness tests to increase confidence that our results are driven by weather-induced mood as opposed to
Our primary prediction is that unpleasant weather triggers low positive affect and/or psycho-
physical effects that make analysts less productive. Psychology research characterizes mood by the
bipolar constructs positive affect (excited vs. sluggish) and negative affect (distressed vs. relaxed), with
each pole labeled as either high or low activation (Clark and Watson [1988]; Watson, Wiese, Vaidya, and
Tellegen [1999]). 4 High positive affect facilitates systematic, careful, cognitive processing, tending to
make it both more efficient and more thorough (Isen [2001], p.75), whereas low positive affect is best
characterized by terms reflecting fatigue, such as sluggish and drowsy and reflects the absence of high
positive affect (Clark and Watson [1988], p. 297; Watson et al. [1999]). Prior research finds that
unpleasant weather can trigger mood states that are characteristic of low positive affect, including fatigue,
depression, anxiety, and limited concentration (Kts et al. [2011]; Howarth and Hoffman [1984];
Denissen et al. [2008]). If unpleasant weather triggers low positive affect in analysts, we expect that those
analysts are less efficient and productive at work. Psycho-physical effects occur when weather-related
discomfort negatively impact[s] employees moods, creating a disposition where it is preferable not to
report to work (Coleman and Schaefer [1990], p. 26), and have been linked to worker absenteeism
3
As noted by Bradshaw [2011], analysts are a good proxy for beliefs held by investors in general, so examining
properties of analyst data provides insight into how investors in general utilize and process accounting information
(page 10). Further, Richardson et al. [2010] remark that equity analysts are a reasonable proxy for the overall
behavior of capital market participants, and that it is useful to support apparent market anomalies by investigating
whether similar phenomenon are observable in analysts earnings and price forecasts (p. 423).
4
Positive and negative affect are considered separate constructs rather than opposite ends of the same spectrum
(Isen [2001]). Some researchers also consider fatigue (a sense of mental or bodily tiredness) as a separate mood
characteristic (Kts, Realo, and Allik [2011]). Other taxonomies further break-out the constructs of pleasantness
(happy vs. sad) and engagement (aroused vs. still) (Watson et al. [1999]). For brevity we follow Clark and Watson
[1988] and include fatigue and low engagement as components of low positive affect.
2
(Markham and Markham [2005]; Bart and Bourque [1995]). 5 If similar weather-related effects occur in
analysts, we expect those analysts are more likely to miss work and/or be less productive.
Because we cannot measure analysts emotional states to distinguish between low positive affect
and psycho-physical effects, we use the term negative mood to describe an analysts overall
psychological response to unpleasant weather. In the context of earnings announcements, we predict that
analysts experiencing weather-related negative moods are slower and/or less likely to respond to earnings
news. We refer to this prediction, which is new to the financial economics literature, as decreased
activity levels.
Analysts, however, have strong incentives to not exhibit decreased activity levels in the presence
of unpleasant weather. First, analysts compensation arrangements create incentives to issue timely
reports following an earnings announcement. For those analysts working at brokerage firms and who are
compensated for generating trading commissions, a timely research report can serve as the starting point
for client conversations that motivate trading and fee generation (Brown, Call, Clement, and Sharp
[2015]; Bradshaw [2011]; Jacob, Rock, and Weber [2008]). 6,7 Similarly, analysts at non-brokerage firms
generate revenue by selling current research, providing an incentive to update their reports after earnings
announcements. In addition to revenue and fee generation, analysts compensation is based heavily on
broker and client votes. Clients demand timely information from analysts, so failing to respond to an
earnings announcement likely negatively impacts the votes analysts receive and, in turn, their
5
An example of a psycho-physical effect is an employee choosing not to go to work on a rainy day because he/she
dislikes getting damp on the way to the office, rather than because of a physical impediment to commuting.
6
Compensating sell-side analysts for generating trades was a widespread, explicit practice prior to the 2003 Global
Settlement, and therefore during most of our sample period ending in 2004. However, the aforementioned cites
indicate that analyst compensation is still a function of trading commissions even after the Global Settlement.
7
An additional consideration is that in recent years analysts have been prohibited from selectively communicating
with their clients without first issuing a report if their recommendation/view has changed since their last published
report. For example, Goldman Sachs was fined $22 million by FINRA and the SEC in 2012 for selectively
disclosing analyst recommendations to important clients between 2006 and 2011 (SEC [2012]). This prohibition is
explicit in FINRA rule 2241 (effective September 2015) and to a lesser degree in NASD 2711 (effective April 2002)
and by the previous NASD Rules of Fair Practice. Our understanding is that analyst firms internal policies often
impose similar equal-disclosure requirements.
3
compensation (Brown et al. [2015]). 8 These incentives are especially acute given the competitive nature
of the analyst industry, where clients readily observe responses by multiple analysts and can easily switch
their loyalties across brokerage and research firms. Thus, a weather-affected analyst who misses a report
risks foregoing compensation in both current and future periods. Second, analysts might actually exhibit
increased responsiveness in the presence of unpleasant weather if the weather leads to an inter-temporal
substitution of work for leisure (Connolly [2008]). Finally, it is also plausible that unpleasant weather
causes psychological effects characteristic of high negative affect, which could potentially motivate
analysts to be more productive at work (Kts et al. [2011], Denissen et al. [2008]).
spanning 1997 2004 and containing 5,456 unique analysts in 139 cities. The average firm-
announcement in our sample includes 7.2 analysts in 3.5 cities, providing substantial within-firm-
announcement variation in analysts weather conditions. In our sample, the unconditional likelihood of an
analyst updating his/her annual forecast within three days after a quarterly earnings announcement is
47%, which indicates that responding to an earnings announcement is an important but noncompulsory
aspect of an analysts job. This is a useful feature because we expect the performance of discretionary
We estimate the effect of weather on analyst behavior using OLS regressions including firm-
announcement and analyst-year-quarter fixed effects. Firm-announcement fixed effects eliminate all
characteristics of the firm, the firms earnings news, and national conditions at the time of the earnings
announcement, and allow us to strictly compare how analysts in dispersed cities simultaneously respond
to the same earnings announcement. Analyst-year-quarter fixed effects eliminate all characteristics of the
8
For example, Brown et al. [2015] find that client accessibility/responsiveness is a primary driver of compensation.
Consistent with this notion, a sell-side analyst practitioner blog states that accessibility/responsiveness are among
the top attributes that buy-siders look for in sell side analysts (http://www.lifeonthebuyside.com/the-institutional-
investor-vote-ranking-sell-side-analysts/, accessed May 2016).
9
Whether an analyst issues a forecast is conditional on the firm, its earnings news, and other analysts responses.
Thus, while the unconditional likelihood of updating a forecast is 47%, the conditional likelihood is likely much
higher (e.g., conditional on the magnitude of the earnings surprise).
4
individual analyst within the quarter (e.g., education, employer characteristics, and average emotional
state), as well as characteristics of the analysts location within the quarter (e.g., labor market conditions
and average weather). We match analyst locations to local weather station data to construct our primary
Unpleasant_Weather treatment variable, defined as the principal component of cloud cover, wind, and
rain. Our models control for severe weather events that likely cause a physical impediment to productivity
Consistent with our decreased activity prediction, we find that analysts experiencing unpleasant
weather are slower to revise their EPS forecasts and are less likely to update their reports within three
days following an earnings announcement, as compared to analysts responding to the same earnings
Unpleasant_Weather is associated with a 2.9% to 4.5% relative decrease in the likelihood of an analyst
releasing an EPS forecast, buy/hold/sell recommendation, or target price recommendation, and a 2.4%
relative increase in forecasting delay. Similar effects are observed when measuring weather based solely
on cloud cover, when measuring weather based on cloud and wind while controlling for rainfall, in cities
with high and low traffic congestion, after dropping all observations with wintery weather, and after
dropping all observations with severe weather. These robustness tests reduce concerns that our decreased
activity results are due to a physical effect of unpleasant weather. We also find similar effects following
positive and negative earnings surprises, that our forecast delay result is robust to controls for forecast
biases, and that weather-related delays do not increase forecast accuracy, which together indicate that
falsification tests increase confidence that our results are not driven by artifacts of the underlying data.
Although not the focus of our paper, we also use our analyst-based research design to investigate
an existing prediction in financial economics: that unpleasant weather causes investor pessimism which,
5
in turn, drives down stock prices. 10 We find that EPS forecasts and target prices issued in response to
earnings announcements by analysts experiencing unpleasant weather are more pessimistic than similar
increase in Unpleasant_Weather is associated with a pessimistic bias in EPS forecasts (target prices) of
roughly 0.016% (0.38%) of price. These results indicate that weather-induced pessimism and decreased
activity simultaneously affect the actions of sophisticated market participants, and indicate that prior
studies focusing solely on pessimism provide an incomplete understanding of the ways in which
among individuals aggregates to impact stock market responses to earnings announcements. Inactivity
due to weather-induced moods could plausibly cause investors to abstain from trading, delay their trading,
or to trade on incomplete information during the earnings announcement window. If these behavioral
responses are sufficiently pervasive, we predict that stock prices will be slower to incorporate new
earnings information, resulting in observably smaller short-window price responses (i.e., earnings
response coefficients, or ERCs) and larger pricing drift (i.e., post-earnings announcement drift, or
PEAD). These market pricing predictions are closely related to analytical and empirical evidence that
reduced attention due to heightened information flows (Hirshleifer, Lim, and Teoh [2009]) or temporal
preferences for leisure (DellaVigna and Pollet [2009]) can delay equilibrium price responses to earnings
announcements.
We investigate the market pricing effects of mood-related inactivity using a sample of 193,198
earnings announcements from 1990 through 2013. In our primary tests, we follow prior research on
weather-induced pessimism and examine the effects of weather in NYC, which is the location of the
highest concentration of market participants in the U.S. (Saunders [1993]; Hirshleifer and Shumway
10
See Saunders [1993]; Hirshleifer and Shumway [2003]; Chang, Chen, Chou, and Lin [2008]; Shon and Zhou
[2009]; Goetzmann et al. [2015]; Goetzmann and Zhu [2005]; and Loughran and Schultz [2004]. Of these, only
Goetzmann et al. [2015] specifically test for an effect of weather on sophisticated market participants behaviors.
6
[2003]). Consistent with our predictions, we document smaller ERCs and larger PEAD when the weather
in NYC is unpleasant. We also find that reduced ERCs are present following both positive and negative
earnings announcements, indicating that these results are distinct from the effects of weather-induced
pessimism. Finally, we find that trading volumes around earnings announcements are lower during
unpleasant weather conditions, which is again consistent with reduced investor activity. Although these
pricing tests lack the identification strengths of our analyst tests, this evidence suggests that inactivity
As a final analysis, we link together our analyst activity and pricing tests by exploring whether
the observed decreases in analyst activity are associated with the delayed price responses we observe at
the market level. Prior to this analysis, we have examined analysts as a proxy for market participants in
general, and argued that our NYC pricing results are likely driven by an effect of weather on a broad
group of market participants located in NYC. However, it is also possible that weather-related decreased
analyst activity directly impacts ERCs and PEAD. 11 In a subsample of observations with available data,
we find that the average weather experienced by analysts covering the firm is associated with reduced
ERCs and higher PEAD, and that the effect of average analysts weather conditions is both
complementary and incremental to NYC weather effects. However, a significant caveat to these tests is
that analysts locations are likely correlated with investors locations, making it impossible to determine
whether average analyst weather conditions impact market pricing through the direct activities of analysts
or other co-located investors. Given these identification concerns, we provide these results for descriptive
Together, we interpret our results as providing strong evidence of a causal relation between
unpleasant weather and analysts decision-making and behaviors following earnings announcements.
11
Although analysts reports following earnings announcements likely contain minimal private information (Ivkovi
and Jegadeesh [2004]; Ball and Shivakumar [2008]), these reports still serve the important function of synthesizing,
interpreting, and rebroadcasting information to investors (Asquith, Mikhail, and Au [2005]; Zhang [2008]; Chen,
Cheng, and Lo [2010]; Livnat and Zhang [2012]). Consistent with this notion, Zhang [2008] finds evidence that
delayed analyst updates immediately following earnings announcement contribute to PEAD.
7
Although we cannot directly observe that this effect is due to weather-induced mood as opposed to other
weather-related factors, we believe that our research design and robustness tests provide reasonable
confidence that the effect is not driven by physical impediments of weather or other likely correlated
omitted variables. We also provide suggestive evidence that inactivity due to weather-induced moods
prediction to the financial economics literature. Our finding that weather-induced negative moods impede
market participants responses to important information events is consistent with behavioral biases
causing muted or delayed responses to earnings announcements. These findings are relevant to research
on financial analysts, as well as studies of market participants more broadly. Further, our stock pricing
tests complement prior capital markets research finding that investor inattention affects market outcomes,
with local weather conditions serving as an exogenous determinant of attention to earnings news
(Hirshleifer et al. [2009]). 12 We view the potential relation between weather, mood, inactivity, and market
induced pessimism impacts stock returns. Such a prediction requires that (1) the decisions and judgments
of individual market participants are affected by weather-induced pessimism, and (2) those behaviors are
sufficiently pervasive, and arbitrage forces sufficiently weak, to affect the market. By focusing on the
activities and output of financial analysts, our paper provides compelling support for the first of these two
decision-making. Our findings complement Goetzmann et al. [2015], which provides evidence that
unpleasant weather induces pessimism in institutional investors judgments and trading activities. 13
12
See also Hong and Stein [1999], Hirshleifer and Teoh [2003], Cohen and Frazzini [2008], Hirshleifer, Lim, and
Teoh [2011], deHaan, Shevlin, and Thornock [2015], Madsen [2016], and Niessner [2015].
13
Bushee and Friedman [2016] find that stronger disclosure standards are associated with lower return-mood
sensitivity. To the extent that analyst coverage and financial intermediation are correlated with stronger disclosure
standards, then reduced analyst activity on cloudy days could also contribute to lower return-mood sensitivity.
8
Finally, we contribute to the psychology and economics literatures by providing large-scale
empirical evidence on the effects of weather-induced mood on individuals professional output and
individuals is mixed and often based on small samples, limited sample periods, and/or self-reported
emotional conditions. To our knowledge, our study is unique in using large-sample, archival data to
investigate the effects of weather-related moods on professionals activity levels and work output. Our
findings plausibly generalize to other professional occupations where individuals face salient economic
incentives.
2. Analyst data
The following subsections discuss our data, sample, and variable measurements. For all variables,
the subscript i identifies the analyst, subscript j identifies the firm, and subscript d identifies the date on
which firm j announces its quarterly earnings. All variables are winsorized at the 1st and 99th percentile,
Table 1, Panel A details our sample construction for the analyst tests. First, we intersect
Compustat, IBES, and CRSP and, to maximize sample accuracy, retain only U.S. public companies
quarterly earnings announcements that have the same announcement dates in Compustat and IBES
(deHaan et al. [2015]). Availability of the IBES Translation File, which is needed to identify analysts
names, limits our sample to 1997 through 2004. This process yields 141,712 firm-announcement
observations. Next, we identify the analysts following each firm as those that both: (i) issue or confirm at
least one annual forecast for the firm within one year preceding the earnings announcement; and (ii) issue
or confirm at least one annual forecast for the firm within one year following the earnings announcement.
observations for analysts that are missing from the IBES Translation File. Due to the high cost of
9
collecting data on analyst locations, we drop analysts that cover fewer than two firms or four firm-
announcements in our sample. We also eliminate firm-announcements with fewer than two analysts
from the annual Nelsons Directories. Finally, we drop 18,609 observations for analysts outside of the
U.S. and 9,090 observations with insufficient weather data, leaving a maximum sample of 635,826 firm-
individual analysts, and 139 unique cities. The average firm-announcement includes 7.2 analysts in 3.5
cities, after excluding singleton observations as discussed in Section 3.1. Sample sizes are further reduced
We examine the effect of local weather conditions on analyst behaviors within the three trading
days starting with firms earnings announcements (days [0, 2]). We choose a measurement window of
days [0, 2] to allow analysts at least two trading days to release a report following the earnings
announcement and because 77.3% of all forecasts released within 10 days of our sample of earnings
announcements occur within days [0, 2], with just 3.9% occurring on day +3. 14
Our four analyst activity measures reflect whether the analyst issues an earnings forecast, stock
recommendation, or target price forecast following the firms earnings announcement and, if a forecast is
issued, the number of days after the earnings announcement that the analyst releases the report:
1. Make_Fcast i,j,d: An indicator variable equal to one if analyst i issues at least one annual earnings
forecast within days [0, 2] of firm js earnings announcement on date d for a future year-end date of
14
deHaan et al. [2015] find that roughly 50% of earnings announcements occur after hours. Further, many
announcers hold a conference call on the following day, in which case an analyst likely will not release a report until
after the call. Thus, in practice, for roughly half of our sample, the [0, 2] window likely provides analysts up to two
days to respond to the earnings announcement. Accurate earnings announcement time stamp data are unavailable for
much of our sample period, so we cannot adjust for after-hours announcements.
10
year y, y+1, or y+2.
recommendation within days [0, 2] of the earnings announcement. To avoid characterizing previously
dropped coverage as inactivity, we require that the analysts last recommendation was issued or
3. Make_Tpricei,j,d: An indicator variable equal to one if the analyst issues a 12-month target price
recommendation within days [0, 2] of the firms earnings announcement. We again require that the
analyst has a previous target price that was issued or confirmed within one year before the earnings
announcement.
4. Fcast_Delayi,j,d: The log of one plus the number of weekdays between the earnings announcement
and the date analyst i provides his/her first annual EPS forecast within days [0, 2].
If unpleasant weather adversely impacts analyst activity levels, we predict lower average
Make_Fcast, Make_Rec and Make_Tprice and larger average Fcast_Delay for analysts experiencing
unpleasant weather relative to analysts responding to the same earnings announcement, but experiencing
pleasant weather.
Although prior research in financial economics typically examines the effects of cloud cover on
investor mood, research in psychology suggests that weather conditions including rainfall, wind,
temperature, air pressure, and humidity can all affect individuals emotional states (see footnote 2).
Denissen et al. [2008] notes that findings are typically stronger when considering weather variables
simultaneously rather than independently. However, because these various weather conditions are highly
correlated, including multiple weather conditions in the same model can induce severe multicollinearity
and complicate coefficient interpretations. An alternate approach is to use principal component analysis to
combine correlated weather variables into parsimonious factors (e.g., Kutzbach [1967]; Jolliffe [1993];
11
To construct our empirical proxy for unpleasant weather, our aim is to follow leading
psychology research in simultaneously examining weather conditions that are likely to have the biggest
impact on mood, while also considering model parsimony, data availability, and comparability with
existing financial economics studies. Given these considerations, our primary unpleasant weather
measure is the principal component of combining cloud cover, wind, and rainfall, under the assumption
that individuals moods are affected not only by lack of sunlight but also by rainy or blustery conditions.
These three weather conditions provide a single principal component with an Eigenvalue greater than one.
Given the high correlations among weather variables, we do not view our primary Unpleasant_Weather
measure as the explicit effect of clouds, wind, and rain, but rather as a broader construct of unpleasant
weather. To facilitate comparisons with prior financial economics research, we also tabulate analyses
Hourly weather data for cloud cover (ranging from 0 to 8 eighths of total sky coverage, referred
to as oktas), rain (i.e., liquid precipitation, in millimeters), and wind speed (in miles per hour) are
obtained from the National Oceanic and Atmospheric Administration (NOAA) ISD-Lite dataset. We
retain only weather data between 6AM to 6PM, and require that non-missing data are available for a
minimum of four hours each day. Cloud, wind, and rain data for each weather station are aggregated to
We match each analyst observation to weather data from the closest available NOAA weather
station, not more than 50 miles away. We determine the location of each analyst based upon his/her city
listed in Nelsons Directory for the year of his/her forecast. 15 Distances are calculated based on the
longitude-latitude coordinates of the weather station and the central coordinates of the zip code within the
15
During our sample period, Nelsons Directories were published at the beginning of each calendar year and
identified analyst locations as of the previous year. Thus, we use the 2004 directory to identify analyst locations
during 2003, and likewise for the remaining years. If an analyst does not appear in a previous or subsequent edition
of the directory, then we assume that the analyst was in the same city for all forecasts made within six months before
and after the end of the preceding year (e.g., July 2002 through June 2004).
12
We measure weather conditions for each analyst observation for the time period starting with the
earnings announcement and ending with the date of the analysts first forecast or recommendation update
within days [0, 2] of the earnings announcement. For analysts that do not issue a recommendation, price
revision, or earnings forecast, we measure weather conditions over the full three-day window. We
calculate the average daily cloud cover, wind speed, and rainfall over the respective measurement window
for each analyst. The resultant variables Cloud, Wind, and Rain are logarithmically transformed in order
to de-emphasize storms and severe weather, give greater weight to differences between heuristic
classifications of good versus unpleasant weather (such as zero rain versus non-zero rain), and mitigate a
significant right skew in the wind and rain data. Cloud, Rain, and Wind are also standardized, which has
no impact on significance tests or calculating principal components, but does facilitate comparing
coefficient magnitudes across the weather variables. Finally, Cloud, Rain, and Wind are combined via
In addition to using logged and winsorized weather variables to de-emphasize extreme weather,
we also explicitly control for severe weather events that have potential physical effects on analyst
behaviors, or that potentially cause psychological effects that are beyond the spectrum of what likely
constitutes normal negative mood. 16 We use the NOAAs Storm Events Database to create an indicator
variable, Severe_Weather, which takes the value of one if any land-based storm event occurs within the
16
For example, severe weather phobia (Westefeld, Less, Ansley, and Sook Yi [2006]; Watt and Difrancescantonio
[2012]) can have a significant impact on behaviors but falls beyond the construct of negative mood that is the
focus of our study. We are unaware of prior findings that generic stormy weather below the severe threshold
causes emotional effects that might fall beyond the construct of negative mood; however, for completeness,
Section 3.3 provides robustness tests controlling for rainfall that likely correlates with stormy conditions.
17
The NOAAs Storm Events Database includes events that meet any of the following criteria: (a) The occurrence
of storms and other significant weather phenomena having sufficient intensity to cause loss of life, injuries,
significant property damage, and/or disruption to commerce; (b) rare, unusual, weather phenomena that generate
media attention, such as snow flurries in South Florida or the San Diego coastal area; and (c) other significant
meteorological events, such as record maximum or minimum temperatures or precipitation that occur in connection
with another event. See http://www.ncdc.noaa.gov/stormevents/.
13
Table 1, Panel B provides descriptive statistics. For completeness we provide information on both
transformed and untransformed variables (e.g., unlogged and unstandardized for the weather variables),
but transformed values are used in all tests below. In our sample, 46.9% of analysts issue an annual EPS
forecast within days [0, 2] of the earnings announcement, 5.3% of analysts issue a buy/hold/sell
recommendation change, and 26% issue a target price recommendation. The average unlogged forecast
delay is 1.01 days. The average target price bias is 23.7%, which is consistent with the average observed
in Bradshaw, Brown, and Huang [2013] for roughly the same period. The average EPS forecast bias
The average untransformed cloud cover, rainfall, and wind realizations in our sample are 4.8
oktas, 0.12 millimeters per hour, and 8.3 miles per hour, respectively. The transformed weather variables
have a mean and standard deviation of roughly zero and one, with the slight differences due to
winsorization. Importantly, the average standard deviation of Unpleasant_Weather within a given firm-
conditions across analysts. The rightmost column of Panel B tabulates the residual standard deviation in
the dependent variables after they are orthoganalized to the analyst-quarter and firm-announcement fixed
effects used in our regression model below. In most cases the fixed effects remove less than 50% of the
variation in the dependent variables. As expected, Table 1, Panel C shows that Cloud, Rain, and Wind are
We test the effects of weather-induced mood on analyst activity using the following OLS model:
d, and Weather is either Unpleasant_Weather or Cloud in analyst i's city during the measurement
14
window. Analyst_Qtr are fixed effects for each analyst-broker-year-quarter combination, and remove all
constant analyst characteristics (e.g., gender and education) as well as control for analyst characteristics
that have little variation within a given quarter (e.g., experience and brokerage firm size). Since an
analyst-broker in our data can be associated with only one city during a calendar quarter, Analyst_Qtr also
control for the geographic characteristics such as labor market conditions and seasonal average weather.
Firm_Announcement are fixed effects for each firm and earnings announcement date. Singleton
observations (i.e., fixed effect groups with only one observation in the available sample) are dropped prior
to estimation to avoid biasing the regression standard errors (Correia [2015]). Net of the fixed effect
structure, the remaining variation consists of local, date-specific conditions relating to analyst i while
he/she responds to firm js earnings announcement on day d. The coefficient of interest is 1. Predicted
Controls vary depending on the model. All models control for severe weather events. Regressions
relating to buy/hold/sell recommendations also control for the outstanding recommendation from before
the earnings announcement (Rec_Before), and regressions relating to target prices control for the pre-
announcement target price scaled by the current market price (Tprice_Before). Standard errors are
Table 2 presents estimations of equation (1). Each column focuses on a different activity measure,
with samples sizes varying depending on availability of the dependent variable as well as due to dropping
singleton observations. In Panel A, Unpleasant_Weather is significantly associated with all four measures
of analyst activity in the predicted directions. Specifically, we find that the probabilities of an analyst
negatively associated with unpleasant local weather conditions after the earnings announcement (first
three columns). We also find that forecast delays are positively associated with unpleasant local weather
conditions after the earnings announcement (fourth column). Given the unconditional average
15
Make_Fcast of 0.469, the results in column (1) indicate that a roughly one-standard-deviation increase in
associated with a 4.5% relative decrease in the likelihood of a buy/hold/sell recommendation, a 2.9%
relative decrease in the likelihood of making a target price recommendation, and a 2.4% relative increase
in forecasting delay. The presence of Severe_Weather has a large, negative impact on analyst activity.
Panel B presents estimates of equation (1) using Cloud. The coefficients on Cloud are similar in
terms of magnitude and significance as those in Panel A, indicating that cloud cover is the primary driver
of the effect of unpleasant weather on analyst activity (and is also consistent with Panel C of Table 1,
showing that Cloud and Unpleasant_Weather are correlated at 79%). In sum, the results in Table 2
The prior section documents evidence consistent with weather-induced negative moods slowing
or reducing analysts responses to earnings announcements. This section examines the robustness of these
results. All robustness tests are tabulated and discussed in greater detail in the Internet Appendix.
It is possible that our research design captures the physical effects of weather on reduced activity
rather than a weather-induced mood effect. For instance, our Severe_Weather binary variable may
incompletely control for the effects of severe weather. We therefore re-run our tests after dropping all
observations where Severe_Weather = 1 and our results are qualitatively unchanged. 19 Unpleasant
weather could also impact analysts commutes such that they are physically unable to get to work on time,
thereby decreasing productivity. We address this concern in three ways. First, we re-run our tests using a
18
As an example in context, a one-unit increase in Unpleasant_Weather from roughly -2.5 to -1.5 (i.e., starting from
a very nice day) reflects an average increase in cloud cover of 1.3 octiles (from 0.2 octiles to 1.5 octiles), 0.006
millimeters of rain (from 0.000 mm to 0.006 mm), and 0.8 mile-per-hour faster wind speed (5.7 mph to 6.6 mph).
19
Throughout this paper, we use the term qualitatively unchanged to mean that the coefficients of interest are the
same sign and remain statistically significant at the 10% level. Or, in the case of insignificant results, qualitatively
unchanged means the results remain insignificant at the 10% level.
16
new measure of unpleasant weather, Unpleasant_Weather_NoRain, defined as the principal component of
just Cloud and Wind and control for Rain under the conservative assumption that the effect of Rain is
entirely due to physical barriers to productivity. Our results are again qualitatively unchanged, indicating
that the effects of Unpleasant_Weather on analyst activity are unlikely driven by rain-related physical
limitations. Second, we drop all observations with freezing temperatures to indirectly control for
accumulated snow or ice which may present significant physical impediments, and again find
qualitatively unchanged results. 20 Finally, we find no difference in results between analysts living in cities
with more versus less traffic congestion, indicating that commuting delays exacerbated by unpleasant
weather are likely not responsible for our reduced activity results. Although weather certainly does have
physical consequences for analysts and their work, our evidence suggests that the effects of weather on
Another concern is that the association between unpleasant weather and reduced forecasting and
recommendation activity is driven by pessimistic analysts choosing not to release a report that could
antagonize managers, as opposed to inactivity due to weather-induced negative moods. Our tests of
forecast delays somewhat mitigate this concern because it is less clear that a pessimistic analyst has an
incentive to delay a forecast as opposed to not releasing it altogether. Nonetheless, we re-examine the
relations between unpleasant weather and analyst activity conditional upon the sign of the firms earnings
surprise. If reduced analyst activity is driven by pessimistic analysts choosing not to release reports, then
we might expect to observe that this pessimism-related effect is asymmetrically larger following negative
earnings surprises than positive earnings surprises. We fail to find consistent evidence of differences in
the effects of Unpleasant_Weather on analyst activity following good versus bad earnings news,
providing no evidence that pessimism drives our activity results. As an additional robustness test, we find
that our Fcast_Delay results are qualitatively unchanged while including a control for pessimism
20
We are unable to directly control for accumulated snow and ice due to a lack of reliable data.
17
Because negative mood can be associated with a more effortful, analytical, and vigilant
processing style, another concern is that the effects we attribute to weather-induced inactivity could
actually be due to weather-affected analysts taking longer to perform more careful analysis (Forgas
[2002], p5; Sinclair and Mark [1995]). In our sample, analysts who do not release an annual EPS forecast
within days [0, 2] of the earnings announcement release their first annual EPS forecast on average 71
calendar days later, suggesting that these analysts are not engaging in careful analyses but rather choose
not to respond to the earnings announcement. To further address this concern, we re-estimate our analyst
tests measuring both analyst activity and weather over a one-week window following the earnings
announcement. This longer window allows weather-affected analysts a few extra days to produce more
careful reports, yet we continue to find significant reductions in our measures of analyst activity. We also
examine the effect of unpleasant weather on unsigned analyst forecast errors. If weather-affected analysts
take more time to perform careful analyses, we should observe more accurate forecasts in the presence of
unpleasant weather. However, weather-induced fatigue and low positive affect could also simultaneously
cause analysts to be less careful, resulting in larger forecast errors. We find no significant association
between unpleasant weather and unsigned forecast errors issued over days [0, 2] or [0, 7], suggesting that
slower, weather-affected analysts who issue forecasts are no more or less accurate than forecast-
We use falsification tests to address the concern that our results are artifacts of spurious
correlations or peculiarities of the data distributions. Specifically, we replace the 139 zip codes in our
sample on a one-for-one basis with 139 random U.S. zip codes located at least 500 miles away. Our
replacement procedure retains all of the cross-sectional and temporal patterns in the original dataset. We
run all of our tests using false weather, repeat the process 99 times, and compare our actual coefficient
21
Our fixed effect structure eliminates average biases affecting all analysts, and re-centers the distribution of
forecasts around zero. Thus, while it is plausible that weather-induced pessimism mitigates well-documented
optimistic biases in long-term forecasts and improves accuracy, we are unable to test for such an effect given our
research design. Rather, our results indicate that weather-related pessimism moves some analysts idiosyncratic
positive forecast errors closer to zero while moving other analysts idiosyncratic errors further below zero, which
cancel each other out in tests of absolute forecast errors.
18
estimates to the distribution of false estimates. Our actual test coefficients are in the extreme tails of the
distributions of false estimates and in the predicted directions, providing no evidence that our results are
Another potential concern is that analysts reduce their output during unpleasant weather not
because they experience weather-related negative moods, but rather in response to decreased demand
from weather-affected clients. Because sell-side analysts clients primarily consist of other sophisticated
market participants such as buy-side analysts, we have little reason to predict that sell-side analysts are
not affected by weather-induced moods while their clients are affected. Furthermore, if analysts serve
clients around the country and have similar information about those clients demand, then our firm-
announcement fixed effects control for reduced analyst activity due to weather affected clients. However,
if analysts across the country primarily serve NYC clients, and if NYC analysts are better aware of
demand from these clients, then our results could be unduly influenced by the 53% of our sample analysts
residing in NYC. Despite large sample reductions, our results are generally unchanged after dropping
NYC analysts and/or while dropping earnings announcements with unpleasant NYC weather, providing
little indication that our results are driven by NYC analysts, clients, or weather. Another possibility is that
analysts primarily serve local clients, in which case demand from local weather-affected clients could
drive our results. Our research design is unable to differentiate between the effects of weather on analysts
moods versus the moods of local clients and, therefore, we are unable to rule out this alternate
explanation.
measure of abnormally unpleasant weather and a specification that includes an estimate of unpleasant
temperature. Results are weaker but qualitatively unchanged using abnormal weather, and an augmented
model that includes an Unpleasant_Temp variable produces qualitatively unchanged results and an
insignificant coefficient estimate on Unpleasant_Temp. We conclude that our results are not sensitive to
the specification of unpleasant weather. Finally, in the presence of unpleasant weather, analysts could
either reduce the number of outputs they deliver (e.g., release just an EPS forecast instead of a forecast
19
and target price) or simply fail to respond at all during the announcement window. To better understand
this issue, we re-estimate our main analysis after replacing our dependent variable with the sum of
produce a negative Unpleasant_Weather coefficient that is almost exactly equal to the sum of the three
coefficients in the regressions of Make_Fcast, Make_Rec, and Make_Price, indicating that weather-
affected analysts do not just reduce the number of items in their reports, but rather refrain from issuing
reports altogether.
Several existing studies in financial economics find evidence consistent with unpleasant weather
inducing investor pessimism and, in turn, driving negative stock returns. 22 These existing studies typically
involve a joint test that unpleasant weather induces a pessimistic bias in individual investors behavior,
and that individual pessimism aggregates to impact equilibrium stock prices. Our analyst-based research
design provides an opportunity to test one of the necessary conditions underlying those pricing tests: that
that forecasts and recommendations issued by analysts experiencing unpleasant weather are
pessimistically biased relative to forecasts and recommendations issued by analysts experiencing more
expect that analysts are more likely to issue buy/hold/sell recommendation downgrades when the weather
is unpleasant. Second, we expect that analysts experiencing unpleasant weather issue target prices that are
biased downward compared to future price realizations. Finally, we expect that analysts experiencing
22
See Saunders [1993]; Hirshleifer and Shumway [2003]; Chang et al. [2008]; Shon and Zhou [2009]; Goetzmann
et al. [2015]; and Bushee and Friedman [2015].
20
unpleasant weather will issue negatively biased EPS forecasts, relative to either future earnings
realizations or to the prevailing analyst consensus. We examine analysts annual EPS forecasts for the
subsequent fiscal year-end (i.e., year y+1 as opposed to the current fiscal year) because longer-window
forecasts require greater judgment and are likely more susceptible to analyst biases (Lin and McNichols
[1998]; Tversky and Kahneman [1974]). Our measures of analyst pessimism are as follows:
buy/hold/sell recommendation within days [0, 2] of firm js earnings announcement on date d, zero if
2. Fcast_Biasi,j,d: analyst i's first subsequent year-end EPS forecast made within days [0, 2] of firm js
quarterly earnings announcement, less the future realized EPS, scaled by price as of the day prior to
the announcement, multiplied by 100. We retain only diluted EPS forecasts to improve comparability
with the IBES actual EPS value. Negative values represent pessimistic forecasts.
3. Fcast_Bias_v2i,j,d: the difference between analyst i's first subsequent year-end EPS forecast made
within days [0, 2] of firm js quarterly earnings announcement, less the consensus forecast value as of
the previous day, scaled by price as of the day prior to the earnings announcement, multiplied by 100.
Consensus forecasts are calculated as the median of all outstanding EPS forecasts issued or reviewed
within the trailing 180 days, retaining only the most recent forecast per analyst. Again, we retain only
4. Tprice_Biasi,j,d: analyst is first 12-month target price made within days [0, 2] of firm js earnings
announcement, less the actual stock price 12 months in the future, scaled by price as of the target
Table 3, Panel A presents select coefficients from estimations of equation (1) for our analyst
21
pessimism measures using Unpleasant_Weather. These estimations suggest that Unpleasant_Weather is
unassociated with recommendation downgrades (column (1)), but significantly and negatively associated
with EPS forecasts and target price revisions (columns (2) through (4)). In terms of magnitudes, a roughly
ahead forecasts 0.0163% of price. Relative to the average share price of $34.91, this bias equates to
roughly $0.0051 per share. Moving from the 5th to 95th percentiles of Unpleasant_Weather is associated
with a pessimistic bias of roughly (3.3 * $0.0051 =) $0.0168 per share. A similar association is observed
for Fcast_Bias_v2 in column (3). Finally, moving from the 5th to 95th percentile of Unpleasant_Weather
is associated with a target price bias of roughly (0.38% * 3.3=) 1.3% of price.
Table 3, Panel B replaces Unpleasant_Weather with Cloud. Results for Cloud are consistently
weaker in Panel B than in Panel A, but results in columns (2) and (3) still find a significantly negative
association between Cloud and EPS forecast biases. The insignificant coefficient on Cloud in column (4)
indicates that Unpleasant_Weather is likely a stronger driver of weather-induced mood than Cloud by
itself, which is consistent with arguments from prior research that weather should be measured as a
multidimensional effect. In sum, the results in Table 3 are consistent with unpleasant weather inducing
As detailed in the Internet Appendix, our analyst pessimism results are qualitatively unchanged in
all of the robustness tests performed for our analyst activity analyses in Section 3.3. The Internet
Appendix also contains discussion and analyses of current year EPS forecasts. Our primary pessimism
tests focus on annual forecasts for year y+1, instead of the current fiscal year, for two interrelated reasons.
First, the effects of behavioral biases on decision-making are more pronounced in long-window forecasts
that are more uncertain and require greater judgment (Tversky and Kahneman [1974]). 23 Second, analysts
likely have a weaker incentive to be accurate in long-window forecasts, because there is ample time to
23
In our research setting, analysts long horizon forecasts involve greater judgment and are subject to more
uncertainty than shorter horizon forecasts because 1) prediction models are less accurate over long horizons, 2)
managers are less likely to provide guidance for year y+1 than for year y, and 3) up to three quarters of financial
information for the current fiscal year is already publicly known.
22
update their forecast before earnings are announced. 24 Using current year forecasts we fail to find a
significant relation between unpleasant weather and current year EPS forecast biases (see Internet
Appendix). Given that mood likely plays a larger role in uncertain contexts, the lack of a relation using
current year forecasts supports our interpretation that documented year y+1 biases are the result of
weather-induced moods.
The behaviors of equity analysts likely resemble those of market participants in general. Because
we find that weather affects the mood and behavior of analysts, weather could potentially impact the
mood and behavior of a sufficiently large number of investors to generate an observable effect on
equilibrium market prices. Prior research finds evidence consistent with weather-induced pessimism
causing investors to temporarily value firms more negatively. Our analyst pessimism tests support this
conclusion. In this section, we investigate whether inactivity due to weather-induced moods affects the
speed or completeness of the markets response to new information. Our predicted pricing effect is both
distinct from, and complementary to, existing research on how weather-induced pessimism affects
Our predictions about weather-induced mood, inactivity, and market pricing are closely related to
the limited attention literature in finance and accounting. The theory underlying this literature typically
assumes that market prices reflect a weighted average of risk-averse investors beliefs about firm value,
and that investors have limited capacity to process information in a timely manner. If a sufficient number
of investors face attention constraints and either trade with a delay or trade on incomplete information,
then these inattentive investors can impede the market price adjustment process. 25 Empirically, the
delayed price adjustment manifests as smaller stock returns per unit of earnings surprise at the time of the
24
Consistent with these arguments, Lin and McNichols [1998] find that analysts biases for underwriter clients are
only observable in longer-window forecasts and recommendations.
25
As discussed by Hirshleifer and Teoh [2003], even if attentive investors can identify mispricing, mispricing can
persist in equilibrium if those attentive investors are limited in the amount of risk they are willing to bear.
23
earnings announcement (i.e., smaller ERCs), followed by larger stock price drift as the initial
Following the limited attention literature, we predict that short-window ERCs will be smaller and
PEAD will be larger if weather-induced mood causes investors to abstain from trading or to trade on an
incomplete information set during the announcement window. Instead of estimating a weighted average
weather experienced by all investors trading in a stock, we follow previous research on weather and stock
returns and investigate our market pricing prediction using weather in NYC, which is the location of the
highest concentration of capital market participants in the U.S. The primary tension in our prediction is
that market participants (including those in other locations and potentially experiencing better weather)
have an economic incentive to arbitrage away weather-induced mispricing. As noted previously, we stress
that our pricing tests lack the identification strength of our analyst-based tests but are provided as an
initial inquiry into the pricing effects of investor inactivity due to weather-induced moods.
Table 4, Panel A details our sample construction for our pricing test. We intersect Compustat,
IBES, and CRSP to obtain an initial sample of earnings announcements for the years 1990 through 2013.
We retain only ordinary common shares of U.S. public companies (CRSP share codes 10 and 11) and
drop observations with insufficient data to calculate unexpected earnings or the return and volume
dependent variables. To reduce the effects of outliers and errors, we drop observations with quarter-end
price below $1, earnings surprise in excess of price, or earnings announcement dates that are before or
more than one year after the fiscal quarter-end. Finally, we drop observations missing weather data or the
Our first set of market tests (labeled ERC tests) examine the mapping of unexpected earnings
26
Alternatively, weather-affected investors experiencing reduced activity might not adequately analyze pre-
announcement information and, therefore, overweight earnings news, yielding larger ERCs (De Bondt and Thaler
[1985]). We predict lower ERCs to be consistent with the bulk of the empirical evidence in the attention literature.
24
news into abnormal returns (AR) over a three-day ERC period starting with the firms earnings
announcement (i.e., days [0, 2]). 27 AR is calculated as the firms buy-and-hold return less the value-
weighted return of a portfolio of firms matched on quintiles of size and book-to-market, multiplied by
100. 28 Our second set of market tests (labeled PEAD tests) examine abnormal returns over days [3, 75]
relative to the firms earnings announcement (AR_PEAD). We use a PEAD measurement window
spanning 75 days because Bernard and Thomas [1990] find that much of the PEAD following quarter q
occurs in the short window around the earnings announcement for quarter q+1; in our sample, the use of a
75-day PEAD window allows us to capture approximately 90% of q+1 earnings announcements.
Unexpected earnings are calculated as the IBES actual EPS less the most recent median consensus
forecast prior to the earnings announcement, scaled by quarter-end price. To reduce the effects of stale
and outlier forecasts, we require that the consensus is no more than 100 days old and is based on at least
two analysts estimates. We sort unexpected earnings into deciles to create the variable UE.
Weather data for our market tests are obtained and assembled via the same process used for our
analyst activity tests. We construct a daily time series of NYC weather by retaining weather data from the
closest available NOAA weather station from the central latitude and longitude coordinates of the
NYSEs zip code. Cloud_NYC, Wind_NYC, and Rain_NYC are the logged and standardized average
hourly cloud cover, wind speed, and rainfall observed over the ERC measurement window, and
We discuss results only for Unpleasant_Weather_NYC as opposed to also discussing results for Cloud for
brevity and because our analyst-based tests indicate that Unpleasant_Weather is better specified. Table 4,
Panel B presents descriptive statistics. All variables are further defined in the Appendix.
27
Our three-day ERC measurement window is chosen to mimic the timing used in our analyst tests. Results are
qualitatively unchanged using a two-day [0,1] ERC returns window.
28
Quintile cut-offs and portfolio returns are sourced from Ken Frenchs website (November 2015). Portfolio
assignments are based on market value as of the end of June preceding the earnings announcement, and book-to-
market as of the trailing December.
25
5.2 Empirical analysis: Market pricing tests
Our first tests are based on separate ERC and PEAD regressions, estimated using OLS:
AR, AR_PEAD, UE, and Unpleasant_Weather_NYC are as previously defined. Controls include severe
weather (Severe_Weather), firm market value (MVE), earnings persistence (Persist), earnings volatility
(Volatility), institutional ownership (InstOwn), stock market beta (Beta), book-to-market (BTM), lag
between the quarter-end and earnings announcement date (RepLag), decile ranking of the number of firms
announcing earnings that day (Busy), an indicator for negative earnings (Loss), an indicator for the fourth
fiscal quarter (FQ4), an indicator for Friday earnings announcements (Friday), and indicators for weeks 1
through 52 to control for seasonal trends (w1-w52). Date fixed effects control for unobserved
characteristics of each earnings announcement date and also absorb the main effects of Weather, Friday,
Busy, and w1-w52 since these variables do not vary across firms within a date. All control variables are
de-meaned before calculating the interactions with UE such that the main effects can be interpreted at the
sample averages. Standard errors are clustered by date. The coefficients 1 and 1 are the main ERC and
PEAD coefficients, respectively, when Unpleasant_Weather_NYC equals 0 (i.e., at the sample average).
The coefficients 1 and 1 are expected to be positive, consistent with the well-documented positive
relations between UE and both the initial price response and subsequent price drift to earnings news. The
coefficients 2 and 2 estimate the differences in ERC and PEAD for increasingly unpleasant weather.
Our hypothesis predicts 2 < 0 and 2 > 0, which would be consistent with unpleasant weather in NYC
In addition to estimating these models using the full sample, we also estimate these models after
splitting the sample into two time periods: pre-2005 and post-2004. We present these separate estimations
26
for two reasons. First, our analyst-level analysis uses data that ends in 2004, so partitioning allows us to
document the magnitude of these pricing effects in the time period contemporaneous with our analyst-
level sample. Second, Green, Hand, and Soliman [2011] and Chordia, Subrahmanyam, and Tong [2014]
find that earnings pricing anomalies attenuate or disappear due to increased liquidity and lower trading
costs in recent years, and Chakrabarty, Moulton, and Wang [2015] find that attention-based mispricing
(i.e., reduced ERCs and greater PEAD, like we examine here) is mitigated by high-frequency, algorithmic
trading in 2008 and 2009. Thus, partitioning the sample at roughly the median date allows us to
investigate whether any weather-based mispricing dissipates in the latter half of our sample.
Table 5, Panels A and B present select coefficients from estimations of equations (2a) and (2b).
Coefficient estimates on our control variables are untabulated for parsimony. In Panel A, our full sample
estimations (without and with controls in columns (1) and (2), respectively) document significant negative
earnings news in the presence of unpleasant weather. Focusing on the PEAD results in Panel B, our full
sample estimations (in columns (1) and (2)) document significantly positive coefficients on the interaction
term UE*Unpleasant_Weather_NYC. This positive relation is consistent with greater PEAD following
those earnings announcements associated with unpleasant weather. Finally, as predicted, results are
substantially stronger for both the ERC and PEAD analyses in the first half of the sample (column (3)
versus column (4)), with an insignificant PEAD result in the post-2004 sample. In sum, our market
analyses are consistent with unpleasant weather in NYC causing delays in market participants reactions
Most prior studies on weather-induced pessimism predict and find that unpleasant weather
unconditionally lowers all firms stock prices (e.g., Saunders [1993] and Hirshleifer and Shumway
[2003]). Our models use adjusted stock returns and daily fixed effects to eliminate the average effects of
weather on stock returns affecting all sample firms, and include UE*Week interactions to eliminate
27
seasonal differences in price responses to earnings news that may correlate with weather. However, it is
possible that daily weather-induced pessimism has a multiplicative effect with UE that is not controlled
for in our model. If so, weather-induced pessimism would cause market participants to underreact to
positive news and overreact to negative news, which could be obscured in our pooled ERC tests.
Panel A of Table 6 provides graphical evidence that is inconsistent with such a pessimism
explanation. The dotted (solid) line plots the average ERC-window return across each UE decile for good
(bad) weather days, where good (bad) weather is defined as Unpleasant_Weather < -0.5 (> +0.5). If
pessimism were driving our results, we would observe that the dotted line is consistently lower (i.e., more
negative) than the solid line across all UE deciles. Instead, the dotted line is attenuated towards zero for
both negative and positive UE, which is consistent with mitigated price responses instead of
pessimistically biased responses. To formally test for this effect, we repeat the ERC tests from Table 5
after splitting UE into two variables: UE_Pos and UE_Neg. The former (latter) takes the value of UE for
earnings surprises greater than or equal to zero (less than zero), and zero otherwise. Results in Panel B of
Table 6 find that the interactions between UE_Pos * Unpleasant_Weather_NYC are significantly negative
in all estimations, consistent with underreactions to good earnings news in the presence of unpleasant
weather. Importantly, the interactions between UE_Neg * Unpleasant_Weather_NYC are also all
negative, consistent with underreactions (not overreactions) to bad earnings news when the weather is
unpleasant. Finally, t-tests find no evidence of differences in the magnitudes of the interactions.29
Weather-induced inactivity may also cause investors to avoid or delay trading on new
information, causing lower trading volumes at earnings announcements when the weather is unpleasant.
29
Finding muted announcement returns to both positive and negative earnings surprises in the presence of
unpleasant weather somewhat contrasts with Shon and Zhou [2009], which finds unconditionally optimistic
response to earnings announcements when NYC weather is extremely sunny. The Internet Appendix provides
further discussion of how our findings relate to those in Shon and Zhou [2009], including how our models are
intentionally designed to remove the effects of unconditional weather-induced pessimism found in prior papers.
28
We measure abnormal trading volume (Abnormal_Volume) as the firms average daily shares traded
during the ERC window divided by the total shares outstanding, minus the firms trailing average over
days [-70, -5]. We then estimate variations of the following OLS model:
Controls include both signed and absolute unexpected earnings, the controls from the previous pricing
models, and, in select models, abnormal market volume. The coefficient 1 captures the effects of
unpleasant weather on abnormal trading volume during the earnings announcement window.
The first three columns of Table 7 present results estimating equation (3) for
Unpleasant_Weather_NYC using the full sample; the fourth and fifth columns present estimations for pre-
2005 and post-2004. Columns (1) and (2) document a negative relation between unpleasant weather and
trading volume, without and with control variables. Column (3) adds Abnormal_Market_Volume and the
results are qualitatively unchanged. Columns (4) and (5) indicate that volume is decreasing with
Unpleasant_Weather in both the earlier and later halves of our sample, but that the coefficient magnitude
and statistical significance are greater in the pre-2005 period. Together, these volume tests support our
hypothesis that weather-induced negative moods impede market responses to earnings announcements.
5.3 Linking the analyst and pricing tests: Average weather in analysts locations
Our pricing predictions thus far are predicated on the notion that unpleasant weather potentially
affects investors in general, thereby leading to reduced ERCs and higher PEAD. However, it is also
possible that the decreased analyst responsiveness caused by unpleasant weather directly impacts ERCs
and PEAD by reducing or delaying the supplementary materials that investors use in trading decisions. In
this section, we attempt to link our pricing tests with our analyst results by replacing NYC weather in our
pricing models with the average analyst weather. To the extent that analysts contribute to delayed price
formation, then we should observe that unpleasant weather in analysts locations is associated with
smaller ERCs and larger PEAD. A significant weakness of these tests is that analysts locations are likely
29
correlated with investors locations, making it impossible to identify whether unpleasant weather impacts
window experienced by the analysts in our analyst dataset, requiring available data for a minimum of two
analysts. Results in columns (1) and (2) of Table 8 present results of our standard ERC and PEAD models
from Table 5 using Unpleasant_Weather_NYC, but restricting the sample to only those observations with
Columns (3) and (4) replace the NYC weather with Unpleasant_Weather_Analyst and produce
qualitatively similar results, suggesting that the analysts average weather affects the market price
response to earnings news. However, given that over half of analysts are located in NYC, the two weather
specifications are highly correlated at 70%. Thus, columns (5) and (6) include both NYC and Analyst
weather. Neither coefficient loads individually, but the linear combination of the two is statistically
significant. Falsification tests in our Internet Appendix fail to find similar results if we replace analysts
weather at the zip-code level with false weather from elsewhere in the U.S., indicating that the
ERC/PEAD results relate to the analysts locations in particular. These results are consistent with NYC
and Analyst weather complementing each other; i.e., we observe pricing effects when the weather is
unpleasant in both locations, but the effect is mitigated when only one of the two measures is unpleasant.
6. Conclusion
supporting a causal relation between weather and individual market participants activity levels following
earnings announcements. Although we cannot directly observe the mechanism driving this relation, we
believe that our research design provides reasonable confidence that the effect is driven by weather-
induced mood as opposed to physical effects. Our market tests provide descriptive evidence consistent
with unpleasant weather systematically affecting the efficiency of the price formation process around a
key information event, as evidenced by reduced ERCs and greater PEAD. Additional analyst-based tests
30
find evidence of weather-induced pessimism coexisting with weather-induced decreased activity.
Our paper contributes in three ways. First, we introduce a weather-related inactivity prediction
to the financial economics literature. This prediction, and our related findings, should be of interest to the
analyst literature, as well as the broader literature studying the capital market effects of limited attention.
Second, we provide support for prior capital markets research finding evidence consistent with weather-
induced pessimism affecting aggregate market pricing. Finally, we contribute to psychology and labor
economics literatures by providing compelling evidence that unpleasant weather affects the work output
of at least one type of professional with salient economic incentives to avoid such biases.
31
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Appendix: Variable Specifications
Panel A: Analyst tests
Unless otherwise noted, weather variables are measured from the date of the earnings announcement through the
date of the analysts first recommendation, target price, or annual EPS forecast release, released within trading days
[0, 2] of the earnings announcement. For analysts that take no actions, weather is measured for the full three-day
period starting with the earnings announcement. Non-binary variables are winsorized at the 1st and 99th percentile.
Measure Description
Cloud Average hourly cloud cover. Measured in eighths (octiles or oktas) of sky coverage, logged,
and standardized
Fcast_Bias Annual EPS forecast for the subsequent fiscal year issued within trading days [0, 2] of the
earnings announcement less actual EPS, scaled by price, multiplied by 100. Positive (negative)
values are consistent with optimism (pessimism).
Fcast_Bias_v2 Annual EPS forecast for the subsequent year less the outstanding consensus as of the previous
day, scaled by price, multiplied by 100. Positive (negative) values are consistent with optimism
(pessimism).
Fcast_Delay Logged number of days between the earnings announcement and when the analyst makes his/her
first annual EPS forecast announcement. Restricted to analysts making a forecast over trading
days [0,2].
Fcast_Error Logged absolute value of Fcast_Bias. Larger values are consistent with greater analyst error.
Make_Fcast Binary variable equal to one if the analyst issues an annual EPS forecast within trading days [0,
2] of the earnings announcement.
Make_Rec Binary variable equal to one if the analyst makes a buy/hold/sell recommendation within trading
days [0, 2] of the earnings announcement. Restricted to analysts who made a recommendation
within the previous year.
Make_Tprice Binary variable equal to one if the analyst issues a target price recommendation within trading
days [0, 2] of the earnings announcement. Restricted to analysts who issued a target price within
the previous year.
MVE Firms market value of equity on the day prior to the earnings announcement, in millions.
Logged when used in regression specifications.
Rain Average hourly rainfall. Measured in millimeters, logged, and standardized
Rec_Before The level of the analysts buys/hold/sell recommendation prior to the earnings announcement.
Integer values coded from 0 for sell to 4 for strong buy.
Rec_Chg Difference between an analysts buy/hold/sell recommendation issued within trading days [0, 2]
of the earnings announcement and the analysts buy/hold/sell recommendation before the
earnings announcement. Positive (negative) values are consistent with optimism (pessimism).
Severe_Weather Binary variable equal to one if any of the following NOAA Storm Events Database event codes
take place in the analysts county during the weather measurement window: Flash Flood,
Flood, Thunderstorm Wind, Lightening, Tornado, Funnel Cloud, Hail, Heavy
Rain, Debris Flow, Dust Devil, Frost/Freeze, High Surf, High Wind, Storm
Surge/Tide, Strong Wind, Wildfire, and Winter Weather.
Tprice_Before The analysts outstanding target price prior to the earnings announcement, scaled by price two
days prior to the earnings announcement.
Tprice_Bias 12-month target price issued within trading days [0, 2] of the earnings announcement less the
actual stock price 12 months in the future, scaled by price as of the target price announcement
date. Positive (negative) values are consistent with optimism (pessimism).
Tprice_Error Logged absolute value of Tprice_Bias. Larger values are consistent with greater analyst error.
Unpleasant_Weather First principal component of combining Cloud, Rain, and Wind.
Wind Average hourly wind speed. Measured in miles per hour, logged, and standardized
37
Panel B: Market response test variables
The ERC window in all tests is days [0, 2] relative to the earnings announcement. The PEAD window is days [3,
75]. Non-binary variables are winsorized at the 1st and 99th percentile.
Variable Description
38
Table 1: Descriptive Statistics
Panel A presents descriptive data on our sample selection. The initial sample includes firm-announcement
observations with available data in Compustat, CRSP, and I/B/E/S that have the same earnings announcement date
in both Compustat and I/B/E/S. Data availability limits the analyst tests to 1997 2004. Firm-announcement-analyst
observations consist of all analysts who issue at least one annual forecast in both the year prior and subsequent to the
earnings announcement. Panel B presents summary statistics on our analyst test variables. See the Appendix for
variable definitions. Unlogged values are provided for information but logged specifications are used in regression
tests. Panel C presents Pearson correlation coefficients between our main weather and primary analyst activity
dependent variables. The superscripts ***, **, * indicate two-tailed statistical significance at the 1%, 5%, and 10%
level, respectively.
Observations
Firm-announcements 141,712
39
Table 1: Descriptive Statistics (Continued)
Panel B: Summary statistics
Residual
N Mean 25 Pct. Median 75 Pct. Std. Dev. Std. Dev.
Dependent variables
Make_Fcast 635,826 0.469 0.000 0.000 1.000 0.499 0.332
Make_Rec 375,914 0.053 0.000 0.000 0.000 0.225 0.177
Make_Tprice 238,287 0.260 0.000 0.000 1.000 0.438 0.319
Fcast_Delay (unlogged) 298,053 1.011 1.000 1.000 1.000 0.600 0.347
Fcast_Delay 298,053 0.647 0.693 0.693 0.693 0.335 0.199
Rec_Chg 375,914 -0.004 0.000 0.000 0.000 0.212 0.168
Fcast_Bias 179,546 0.997 -0.793 0.218 2.105 5.135 0.897
Fcast_Bias_v2 183,445 -0.340 -0.488 0.000 0.236 1.777 0.842
Tprice_Bias 59,854 0.237 -0.163 0.112 0.464 0.883 0.117
Weather variables
Cloud (untransformed) 635,826 4.812 3.495 5.000 6.417 2.044
Cloud 635,826 0.000 -0.361 0.255 0.707 1.000
Rain (untransformed) 635,826 0.121 0.000 0.004 0.108 0.260
Rain 635,826 -0.010 -0.508 -0.486 0.029 0.941
Wind (untransformed) 635,826 8.336 6.245 7.867 10.055 2.957
Wind 635,826 0.003 -0.613 -0.002 0.665 0.967
Unpleasant_Weather 635,826 -0.003 -0.525 0.012 0.504 0.967
40
Table 2: Influence of Unpleasant Weather on Analyst Activity
This table presents select coefficients from various estimations of the following OLS model:
Activity is one of our four proxies for analyst activity. Panels A and B present regressions using
Unpleasant_Weather and Cloud, respectively. Fixed effects are untabulated. Observations with singleton fixed
effects are dropped prior to estimation. See Appendix for variable definitions. Standard errors are clustered by
earnings announcement date. The superscripts ***, **, * indicate two-tailed statistical significance at the 1%, 5%,
and 10% level, respectively.
Panel A: Unpleasant_Weather
Panel B: Cloud
41
Table 3: Influence of Unpleasant Weather on Analyst Pessimism
This table presents select coefficients from various estimations of the following OLS model:
Panel A: Unpleasant_Weather
Panel B: Cloud
42
Table 4: Market Pricing Analysis Descriptive Statistics
Panel A presents descriptive data on our sample selection procedures. The initial samples include firm-
announcement observations with available data in Compustat, CRSP, and I/B/E/S, and that have the same earnings
announcement date in both Compustat and I/B/E/S. The market pricing tests span 1990 through 2013. Panel B
presents summary statistics. See the Appendix for variable definitions.
Observations
Firm-announcements with validated earnings announcement dates 327,467
Drop: CRSP share codes other than 10 and 11 (ordinary, common, US shares) -17,486
Drop: missing UE, abnormal volume, or abnormal stock returns -112,245
Drop: price < $1 or unexpected earnings > price -1,232
Drop: earnings announcements before or more than one-year after quarter-end -106
Drop: missing control variables -1,577
Drop: missing weather data -1,712
Final firm-announcement sample 193,109
Other Variables
UE (not in deciles) -0.0008 -0.0009 0.0003 0.0018 0.0114
MVE 6.729 5.518 6.593 7.793 1.668
BTM 0.544 0.270 0.455 0.707 0.417
Replag 3.327 3.091 3.332 3.584 0.380
Analysts 1.784 1.099 1.792 2.303 0.727
Persist 0.332 -0.048 0.232 0.706 0.599
Volatility 0.426 0.094 0.200 0.445 0.675
Beta 1.064 0.659 1.011 1.403 0.562
InstOwn 0.590 0.397 0.612 0.791 0.249
FQ4 0.251 0.000 0.000 1.000 0.434
Loss 0.179 0.000 0.000 0.000 0.384
Friday 0.062 0.000 0.000 0.000 0.242
Busy 4.441 2.000 4.000 7.000 2.847
Severe_Weather 0.042 0.000 0.000 0.000 0.200
43
Table 5: Influence of Unpleasant Weather on the Market Pricing of Earnings News
This table presents select coefficients from various estimations of the following OLS model:
44
Table 6: ERC Tests by Positive versus Negative Earnings Surprise
Panel A plots average ERC-window returns within each UE decile, separately depending on whether the weather in
NYC is good or bad. Good (bad) weather is defined as Unpleasant_Weather_NYC < -0.5 (> +0.5). Panel B presents
select coefficients from various estimations of the following OLS model:
The variable UE_Pos (UE_Neg) takes the value of UE for earnings surprises greater than or equal to zero (less than
zero), and zero otherwise. All other variables are unchanged from Panel A of Table 5. Controls are untabulated for
brevity. Standard errors are clustered by earnings announcement date. The superscripts ***, **, * indicate two-tailed
statistical significance at the 1%, 5%, and 10% level, respectively.
Panel A: Plot of ERC-window returns by UE decile and good versus bad NYC weather
45
Table 7: Influence of Unpleasant Weather on Trading Volume
This table presents select coefficients from various estimations of the following OLS model:
Abnormal Volume is the firms share turnover during the earnings announcement period [0, 2] minus normal trading
volume in the trailing days [-75, -5]. Untabulated controls include signed and absolute UE deciles, Severe_Weather,
MVE, Persist, Volatility, InstOwn, Beta, BTM, Loss, FQ4, Replag, Friday, Busy, and w1-w52. Columns (3)-(5) also
include an additional control for the average abnormal volume for all CRSP firms. Column (4) estimates the model
using pre-2005 data. Column (5) includes post-2004 data. Controls and fixed effects are untabulated for brevity.
Standard errors are clustered by earnings announcement date. The superscripts ***, **, * indicate two-tailed
statistical significance at the 1%, 5%, and 10% level, respectively.
46
Table 8: Pricing Tests Using Analysts Weather
This table presents select coefficients from various estimations of the following OLS model:
Linear Combination
UE*Unpleasant_Weather_NYC + (UE
*Unpleasant_Weather_Analyst -0.0388 0.1742
[1.96]** [2.90]***
Controls, Main Effects, Fixed Effects Yes Yes Yes Yes Yes Yes
Date fixed effects Yes Yes Yes Yes Yes Yes
N 70,648 70,648 70,648 70,648 70,648 70,648
Adjusted R-squared 0.0669 0.0276 0.0669 0.0275 0.0669 0.0276
47