Nature is well known to have an impact on our well-being and our productivity.  New research from the City University of Hong Kong reveals that exposure (or lack of) to sunshine also affects our decision-making.

The research found that if the weather is nice before a firm releases its earnings forecast, managers seem to release more positive and optimistic forecasts than if the weather is cloudy.

“Decisions made by U.S. public firm executives are usually consequential to their firms and could potentially affect the economy. Therefore, it is important to understand whether transient emotions affect their decision making and, if so, to what extent,” the researchers say.

Sunny mood

To explore the impact of the weather on decision-making, the researchers examined around 30,000 different earnings forecasts from public firms in the US between 1994 and 2010.  They cross-referenced these decisions with data from weather stations in the vicinity of the managers to understand the sun exposure for them around the time of the forecasts.

The data revealed that managers would often provide more upwardly biased forecasts if the days prior to the forecast were sunny.  This bias was particularly pronounced among less experienced managers, or if the firms were operating in a more uncertain environment with poorer information.

The researchers concluded that the sunny weather made people feel good, which in turn made them more likely to be optimistic with their forecasts.  However, this effect appeared to be dampened if forecasts were likely to be heavily scrutinized or the managers were incentivized to provide more accurate forecasts.  For those managers who are influenced by the weather, however, it comes at a clear cost.

“CEOs prone to the sunshine priming effect convey biased information to the capital market, which makes it difficult for investors to make investment decisions on the firm. This increases firm information risk and raises the financing costs of that company,” the researchers explain.

What’s more, this was not just something that affected the firm, as it also appeared to affect the career path of the managers themselves, as the data showed they suffered from lower pay, shorter tenure, and progressed to CEO less often.

“In this research, we have examined the role and economic consequences of emotions in shaping the judgment of corporate executives. When developing corporate governance structures, regulators and boards may need to consider that emotions play a role in influencing the managers in disclosing information about the company. Our research also alerted investors to take into account the likely mood of the managers when interpreting their public disclosures,” the researchers conclude.