Abstract
I construct the Sports Mood Index (SMI) of 49 metropolitan areas in the U.S. and Canada based on the performance of Big 4 professional sports teams and build the firm-level SMI based on institutional investors’ holdings as a proxy for investors’ mood. In sports-induced bad mood settings, earnings announcement premium becomes higher because of increased uncertainty avoidance premium, and post-earnings-announcement drift (PEAD) becomes lower because of the reversal effect. A one-standard-deviation increase in the SMI leads to a 22 bps increase in earnings announcement premium and a 16 bps decrease in PEAD in the following week. Whereas sports-induced good mood has no significant impact on the trading behavior of institutional investors, sports-induced bad mood leads to inattention. Institutional investors with sports-induced bad mood underreact to standardized unexpected earnings when faced with both positive and negative news, as evidenced by lower abnormal trading volume around earnings announcement days.
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