Even the Most ‘Sophisticated’ Investors Have Rainy Days

Research shows that unpleasant weather can lead to delayed information processing and sluggish price reactions.

Mark Kauzlarich/Bloomberg

Mark Kauzlarich/Bloomberg

When a raincloud breaks over a portfolio manager’s office, it may bring a mental fog that can cloud market performance.

Unpleasant weather — like snow, rain, clouds, and wind — can have psychological and physiological impacts on institutional investors, resulting in slower processing of earnings news and an amplified “post-earnings announcement drift” among a firm’s top investment professionals, according to a study from Stony Brook University professor Danling Jiang, Troy University’s Dylan Norris, and George Mason University’s Lin Sun. The post-earnings announcement drift, known as the PEAD effect, refers to the tendency for a stock’s cumulative abnormal returns to drift for a long period of time following an earnings announcement.

Previous research suggests that unpleasant weather induces feelings of pessimism, anxiety, fatigue, and difficulty concentrating, the authors said. For institutional investors, these moods can delay information processing and lead to a greater price discount for uncertainty. As a result, price reactions to earnings announcement become more “sluggish” and earnings announcements premiums rise, the researchers found.

“Our paper extends existing studies by showing that weather does not just affect individuals’ optimism, pessimism, and trading behavior, but also influences how investors, particularly institutional investors, process newly arrived public information and exert an impact on the speed and the degree of market pricing of announced news,” they wrote.

When Investors Are Under the Weather


Unlike previous research on the connection between weather and market participants’ performance, Sun told Institutional Investor that she and the other authors examined which types of investors are most impacted by the weather. The researchers identified the top ten institutional investors at each firm and located the weather stations within a 50-kilometer radius of the zip code of each investor’s headquarter location. Jiang, Norris, and Sun then examined the weather over a two-week period before an earnings announcement. When unpleasant weather arose in the area on the day of an earnings announcement, institutional investors were more likely to have delayed market responses, reflected as weaker immediate reactions and stronger post-earnings-announcement drifts.

“The weaker immediate reaction is reflected in the price, the abnormal returns,” Sun said in a phone call with II. “In the post announcement window, the 60 days after the last month, we expect to see a strong group drift.”

Sun said the findings were particularly interesting, in part, because there is a general assumption that institutional investors are more “sophisticated,” and therefore should be less influenced by external biases like weather. But the data prove the opposite to be true.

“This particular group of institutional investors actually caused quite a dramatic impact on the market process of information,” Sun said.

Putting a Damper on Trading

Pre-announcement unpleasant weather was also found to be associated with a higher earnings announcement premium. The researchers said that in the period before a company reports earnings, a gloomy day was associated with lower trading volume, with increased cloud coverage linked to 12 percent lower abnormal trading volume.

Jiang, Norris, and Sun interpreted these findings as products of weather-induced anxiety, which can lead to “uncertainty aversion,” the paper said. This risk avoidance then leads to reduced trading.

Sun said this weather bias is hard to control, but it is still important for investors and firms to acknowledge its existence.

“When I’m having a rainy day, I’m in a bad mood,” Sun said. “My productivity levels are apparently lower than on a sunny day. I think this kind of mood-driven impact is hard to get around.”