Weather, Institutional Investors, and Earnings News

By | May 13, 2021

There is a large amount of evidence that unpleasant weather conditions influence an individual’s psychological and physiological states associated with fatigue, anxiety, depression, and limited attention to work. Such psychological and physiological impacts on financial market participants carry important implications for understanding investor behavior and asset prices. 

Saunders (1993) is the first to show that cloud cover in New York City affects daily returns of the Dow Jones Industrial Average Index, and that market returns are significantly lower on cloudy days than on sunny days. Hirshleifer and Shumway (2003) extend Saunders’ evidence out of sample across 26 major stock markets around the world and propose a mood-based explanation for the weather effect on stock markets: sunny weather induces optimism and more risk taking while cloudy weather does the opposite. Their evidence suggests that the influence of sunshine on stock markets is pervasive across countries and robust at least through the 1990’s.  

Several subsequent studies investigate which groups of market participants are responsible for the weather effect on stock markets. Existing evidence suggests that sophisticated market participants (rather than retail investors), such as market makers, institutional investors, and security analysts, are likely responsible for the relation between weather and security pricing. 

The previous research has mainly focused on how weather conditions influence investor behavior and security returns. Our recent work, “Weather, Institutional Investors, and Earnings News”, extends this line of research by showing that unpleasant weather in institutional investors’ locations is associated with muted or delayed market responses to earnings announcements, as evidenced by weaker immediate market reactions and stronger post-earnings-announcement drifts. We hypothesize that unpleasant weather (e.g., cloudy, rainy, snowy, or windy days) experienced by institutional investors impedes efficient and timely processing of new information, leading to delayed price response to earnings news on securities held by these institutional investors. Moreover, unpleasant weather induces pessimism, uncertainty avoidance, and inactivity, leading to higher earnings announcement premia and lower trading volume.

Weather Data and Measures

Our weather data are collected from the National Oceanic Atmospheric Administration’s (NOAA) Integrated Surface Database (ISD-lite). We obtain the hourly cloud cover (cloud), wind speed rate (wind), and liquid precipitation (rain or snow) depth dimension data for all weather stations in U.S. Our main measure of weather conditions is unpleasant weather, which integrates signals from cloud cover, precipitation depth, and wind speed. 

Specifically, we take three steps to measure unpleasant weather experienced by a firm’s major institutional investors. First, we identify all weather stations within a 50-kilometer radius of the centroid of the zip code of an institutional investor’s headquarter location. The institution-level unpleasant weather measure is defined as the first principal component of the daily logarithmic cloud cover, precipitation, and wind speed. Next, we measure unexpected unpleasant weather by taking the average daily value over two weeks prior to the earnings announcement day and subtracting the seasonal norm. Finally, the daily stock-level measure of institutional investors’ unpleasant weather is the holding-weighted average of the institution-level measures across a stock’s top ten largest institutional investors, based on their reported holdings as of the previous quarter end.


Using data from 1990 to 2016, we find strong empirical evidence supporting our hypotheses. Unpleasant weather experienced by a firm’s major institutional investors impedes immediate market responses to earnings news and amplifies the post-earnings-announcement drift. Conditioning on earnings surprises, a one-standard-deviation increase in pre-announcement unpleasant weather leads to a 10% smaller spread in announcement returns between top and bottom earnings surprise deciles (relative to mean spread), yet a 26% larger spread in post-earnings-announcement drift (relative to the mean). This evidence suggests that unpleasant weather impedes information processing of institutional investors and amplifies the well-known market underreaction to earnings news.

Moreover, we find evidence that unpleasant weather of institutional investors induces a higher price discount for earnings uncertainty, which elevates earnings announcement premium. Earnings announcement premium refers to the higher average returns observed during the earnings announcement period than the non-announcement period. Our estimates show that announcing firms exhibit about 90% higher return in the announcement month when the firm’s major institutional investors experience one-standard-deviation more unpleasant weather prior to the beginning of the announcement month. Our explanation is that unpleasant weather induces greater uncertainty avoidance and thus a higher price discount for earnings uncertainty. This is in line with previous findings that uncertainty over earnings information is a primary driver of the announcement premium.

As corroborating evidence, we also find that when institutional investors experience unpleasant weather during the pre-announcement period, trading volume is abnormally lower in the contemporaneous period. In terms of economic magnitude, a one-standard-deviation increase in the unpleasant weather experienced by institutional investors is associated with an 8% lower abnormal trading volume during the pre-announcement period. This evidence provides some support to our hypothesis that unpleasant weather triggers physiological responses of investors, reflected in part via lower trading activities.

We conduct several robustness checks to validate our findings. Previous research has shown that unpleasant weather (cloud cover in particular) of New York City (NYC) impacts daily market returns and market pricing of earnings news. Since many sophisticated market participants (such as market makers, equity analysts, institutional investors, etc.) are located in NYC, we control for NYC weather conditions to alleviate the concern that our findings are a repackaging of the NYC weather effect. In further analysis, we separate institutional investors located outside of NYC and those outside of hedge fund centers, where other influential market participants may populate, and our main findings are preserved. This suggests that the weather influence of institutional investors we identify is distinct from the NYC weather effect documented in the literature and unlikely to be driven by other sophisticated market participants (such as market makers, financial analysts, etc.) located in major U.S. cities.

To account for the weather-induced physical impediment as opposed to the physiological and psychological impediments to information processing, we control for extreme weather events to rule out the possibility that severe weather conditions prevent institutional investors from physically attending work, therefore reducing the speed of reaction. We confirm that our main findings are robust to controls of extreme weather events. 

Furthermore, it is known that a firm’s top institutional investors tend to locate in the firm’s headquarter city and trading of local stocks is affected by local weather. Thus, unpleasant weather at the location of firm headquarters may influence not just institutional investors but also local (retail) investors, who, according to an extensive literature on local bias of individual investors, tend to hold and trade local stocks. We find that unpleasant weather near firm headquarters causes market underreactions to earnings news to some extent. However, once controlling for unpleasant weather near a firm’s major institutional investors, we find no impact of firm headquarter weather, but significant incremental impact of institutional investors’ weather. Our evidence is largely consistent with prior studies that weather experienced by retail investors has a weak impact on equilibrium prices. 


A growing strand of literature in economics, finance, and accounting suggests that weather conditions impact the physiological and psychological states of market participants and, therefore, influence financial decisions and security pricing. Our paper shows that weather does not just affect individuals’ optimism, pessimism, and trading behavior, but also influence how investors, particularly institutional investors, process newly arrived public information and exert an impact on the speed and the degree of market pricing of earnings news. We find robust evidence that pre-announcement unexpected unpleasant weather experienced by institutional investors is associated with delayed market responses to earnings news, reflected as weaker immediate reactions and stronger post-earnings-announcement drifts. The pre-announcement unpleasant weather is also associated with a higher earnings announcement premium. We interpret the findings as weather-induced anxiety induces uncertainty aversion and increases the required uncertainty premium while also reducing institutional investor trading.

Danling Jiang is a Full Professor of Finance and the Associate Dean of Research and Faculty Development at the College of Business, Stony Brook University

Dylan Norris is an Assistant Professor at Troy University

Lin Sun is an Assistant Professor at George Mason University 

This post is adapted from their paper, “Weather, Institutional Investors, and Earnings News

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