Using the Chinese stock market data, we test the hypothesis that cognitive dissonance influences the stock market response to earnings news. Supporting this notion, we find that investors disregard earnings news that contradicts their sentiment due to cognitive dissonance, thereby causing a muted announcement date price reaction to such news. Further analysis shows that higher retail concentration and greater valuation uncertainty of the underlying firm exacerbate this cognitive dissonance and hence amplify its impact, but less credible financial report does not. Finally, we find that cognitive dissonance is temporary for bad news under optimism, but is quite persistent for good news under pessimism. Overall, our findings offer a behavioral bias explanation to understand why investors underuse accounting information.

Prior literature examines the impact of geographically close natural disasters on top executives’ risk perceptions. Using Chinese data, this study investigates how corporate risk-taking is influenced by psychologically close disasters, which may be geographically distant. Specifically, we focus on major natural disasters that occur in places emotionally attached to CEOs or chairmen, including their hometowns and college locations. We show that top executives increase corporate risk-taking, manifested in higher return volatility and riskier corporate policies, following disasters in their geographically distant places of attachment, while no such effect is observed for close places of attachment. This effect continues into the next four to eight quarters. The increase in risk-taking is amplified when the disaster event is more salient and when the executive has a stronger connection to their distant attached places, and it is weaker for executives with better emotional resilience. Collectively, our study sheds additional light on the important role of affective connections in corporate risk decisions.