cognitive dissonance in investors' reactions to earnings news: the moderating role of liquidity, financial reporting credibility, and earnings sustainability

Based on cognitive dissonance bias, investors tend to ignore earnings news that is inconsistent with their emotional state. this bias causes investors to be unresponsive to good (bad) earnings news under pessimistic (optimistic) conditions. stock liquidity, financial reporting quality, and earnings persistence can influence investors’ reactions to earnings news. accordingly, this study aims to examine the role of stock liquidity, financial reporting credibility, and earnings persistence in investors' cognitive dissonance toward earnings news. the research 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 employed, and the principal component analysis (pca) method was used to construct a composite investor sentiment index. according to the findings, investors’ reactions to good and bad earnings news are asymmetric. in optimistic sentiment conditions, investors respond positively to good earnings news and remain unresponsive to bad news. conversely, under pessimistic sentiment, they react negatively to bad news and show muted reactions to good news (indicating the presence of cognitive dissonance). moreover, the results indicate that improved financial reporting credibility reduces cognitive dissonance. 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 biases diminish, and their decisions align more closely with economic realities. this contributes to the reduction of cognitive dissonance and, in a way, weakens its effects.