Disclosure Standards and the Sensitivity of Returns to Mood

Brian J. Bushee; Henry L. Friedman

doi:10.1093/rfs/hhv054

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Disclosure Standards and the Sensitivity of Returns to Mood

Brian J. Bushee¹; Henry L. Friedman²

¹ University of Pennsylvania · ² University of California, Los Angeles

Review of Financial Studies 2015 open access

We provide evidence that higher-quality disclosure standards are associated with stock returns that are less sensitive to noise driven by investors' moods. We identify return-mood sensitivity (RMS) based on the association between index returns and urban cloudiness, a source of short-term variation in mood. Based on a stylized model, we predict and find evidence consistent with higher-quality disclosure standards reducing RMS by tilting susceptible investors' trades toward information and by facilitating sophisticated investors' arbitrage. Our findings suggest that disclosure standards play an important role in enhancing price efficiency by reducing noise in returns, particularly noise related to investors' short-term moods. Received January 31, 2014; accepted August 5, 2015 by Editor David Hirshleifer.

DOI: 10.1093/rfs/hhv054
Pages: hhv054
Language: en
Export: BibTeX
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