Investor cognitive engagement with earnings information: evidence from pupillary response

Abstract

Using pupillary response data collected in a laboratory setting, this study examines the antecedents and consequences of investors’ cognitive engagement with earnings press releases. We predict that investors’ cognitive engagement is higher when key financial information is included in the headline section of the earnings release, and that their level of cognitive engagement affects their willingness to invest. Our experiment reveals that when reading an earnings release that headlines key financial information, investors exhibit enhanced cognitive engagement as evidenced by increased pupil dilation compared to when reading a release that does not include key financial information in the headline section. These results hold for both good and bad earnings news. Furthermore, OLS regressions show that investors with greater pupil dilation, on average, exhibit increased willingness to invest only when the earnings news is positive. This relation is however nonlinear, with a significant impact on investment decisions observed only when cognitive engagement is relatively high. We also find that investors’ cognitive engagement varies when they read different sections of the earnings release. Taken together, our findings use pupillary responses to provide new insights into investors’ cognitive reactions to earnings news.