Investor Emotions and Earnings Announcements
This research addresses the problem of understanding market dynamics for investors and analysts by showing that emotions can negatively impact short-term value, though it is incremental in applying existing sentiment analysis to earnings announcements.
The study tackled the problem of how investor emotions, measured from social media data, predict earnings and announcement returns, finding that increased excitement before announcements leads to lower returns, with a standard deviation increase associated with a 7.8 basis points drop and an approximate -5.8% annualized loss.
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.