Sunshine bias

Nov 24th, 2022

Susan White


Sunshine is known to positively impact physical health and mental well-being.

Interestingly, a researcher from Memorial’s business faculty has discovered that sunshine can also influence earnings forecasts from corporate executives.

Dr. Jeffrey Pittman is an accounting professor and Chair in Corporate Governance and Transparency at the Faculty of Business Administration.

His forthcoming paper for The Accounting Review, Managerial Mood and Earnings Forecast Bias: Evidence from Sunshine Exposure, examines whether corporate earnings forecasts are sensitive to sunshine levels around companies’ headquarters in the U.S. in the preceding two weeks.

Good mood leads to forecast bias

The research team found that good mood, which they measure with recent sunshine exposure, upwardly biases forecast earnings.

“The initial motivation for this research project stems from extensive evidence in neurobiology implying that sunshine is highly associated with individuals’ moods,” Dr. Pittman said. “Accordingly, if an executive’s emotions shape their judgment about future company performance, their earnings forecast will vary with sunshine conditions.”

The paper is co-authored with Dr. Chen Chen, Monash University, Australia; Dr. Yangyang Chen, City University of Hong Kong, China; Dr. Edward Podolski, Deakin University, Australia; and Dr. Madhu Veeraraghavan, T.A. Pai Management Institute, India.

Role of corporate governance structures

After establishing that sunshine-induced optimism affects earnings forecasts, the researchers then explored whether certain corporate governance structures constrain this bias.

“Rather than emotions inevitably affecting corporate disclosure practices, we find that sound corporate governance structures can limit its impact.” — Dr. Jeffrey Pittman

They found it to be less severe when companies are subject to more media or financial analyst coverage, and when executive compensation is tied to the accuracy of their forecasts.

“Our evidence suggests the sunshine effect subsides when executives have strong financial incentives to make accurate earnings forecasts or face strict external monitoring,” said Dr. Pittman. “Rather than emotions inevitably affecting corporate disclosure practices, we find that sound corporate governance structures can limit its impact.”

They also found evidence that executives who let sunshine bias distort company disclosures pay a heavy price in the form of shorter tenure, lower compensation and fewer promotions.

Most productive researcher

Dr. Pittman has been a professor at Memorial since 2000. His research primarily focuses on the impact of external monitoring on corporate financial reporting transparency.

His work is both nationally and internationally renowned.

Recent analysis by Utah’s Brigham Young University finds that Dr. Pittman is the most productive accounting researcher worldwide, publishing the highest number of papers in the top five accounting journals in the past three, six and 12-year periods.

Dr. Pittman has published eight articles in The Accounting Review, Journal of Accounting Research, Journal of Accounting and Economics, Contemporary Accounting Research and Accounting, Organizations and Society in the past three years, 13 in the past six and 21 in the past 12.

He has also published in other major business journals outside of accounting, including the Journal of Financial Economics and the Journal of Business Ethics.

“It’s quite gratifying when your research impacts, for example, the public policy discourse,” he said. “My work has been cited to justify watershed corporate governance reforms in Canada, the U.S. and elsewhere. Naturally, the quality of your research is far more important than its quantity.”

Besides working on his own research program, Dr. Pittman strives to help develop the next generation of researchers, including by mentoring more junior colleagues and teaching graduate students.

“I hope I’m part of a virtuous cycle in that I have benefited enormously from guidance from more senior colleagues earlier in my career. I’m eager to help others just starting on a career in research to thrive.”