Cognitive Dissonance in Investors' Reactions to Earnings News: The Moderating Role of Liquidity, Financial Reporting Credibility, and earnings Sustainability

Articles in Press

Document Type : Original Article

Authors

1 Ph.D. in Accounting, Faculty of Administrate and Economics, University of Isfahan, Isfahan, Iran

2 Assistant Prof. of Accounting, Faculty of Administrative Sciences and Economics, University of Isfahan, Iran

10.22108/far.2025.144682.2119

Abstract

Based on cognitive dissonance bias, investors tend to ignore earnings news that contradicts their emotional state. This bias causes investors to be unresponsive to good (bad) earnings news in pessimistic (optimistic) conditions. Stock liquidity, financial reporting credibility, and earnings persistence can influence investors' reactions to earnings news. Therefore, the aim of this study is to examine the role of stock liquidity, financial reporting credibility, and earnings persistence in investors' cognitive dissonance toward earnings news. The statistical sample includes 127 companies listed on the Tehran Stock Exchange over the period from 2011 to 2022. To test the hypotheses, multivariate regression models were used, and the Principal Component Analysis (PCA) method was applied to construct a composite sentiment index. According to the research findings, investors' reactions to good and bad earnings news are asymmetric. In optimistic sentiment conditions, investors react positively to good earnings news and remain unresponsive to bad news, whereas in pessimistic sentiment conditions, they react negatively to bad earnings news and remain unresponsive to good news (indicating the presence of cognitive dissonance). Additionally, the results indicate that as financial reporting credibility improves, cognitive dissonance decreases. However, stock liquidity and earnings persistence do not have a significant impact on mitigating cognitive dissonance. When financial information becomes more accurate and reliable, investors' cognitive errors and distortions decrease, leading to decision-making that is more aligned with economic realities. This contributes to the reduction of cognitive dissonance and, in a way, weakens its effects.

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Main Subjects

Financial Accounting Research

Articles in Press, Accepted Manuscript
Available Online from 08 June 2025

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History

  • Receive Date: 15 March 2025
  • Revise Date: 07 June 2025
  • Accept Date: 08 June 2025

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