Sleep Disruptions and Information Processing in Financial Markets

Abstract

Despite evidence of the importance of sleep for cognitive performance, prior research finds limited effects of sleep disruptions on financial markets. This is puzzling because financial decisions rely on higher-order cognitive processes that are typically affected by sleep. We reconcile this dissonance by examining forecasts of corporate earnings by nonprofessional and professional forecasters. We find that nonprofessional forecasters exhibit a significant decline in their forecast accuracy following spring daylight saving time changes relative to professional forecasters. Using a separate sample of professional equity analysts’ forecasts, we continue to find that the information processing of analysts with less expertise is disproportionately negatively affected following sleep disruptions. Placebo tests provide support for sleep disruptions as the main driver of these effects. Overall, our evidence that information processing by less experienced and skilled market participants is particularly vulnerable to sleep disruptions provides one compelling reason why aggregate financial markets seem to be immune to sleep effects even though individual participants are not. This paper was accepted by Ranjani Krishnan, accounting. Supplemental Material: The internet appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01102 .