Clouded Judgment: The Role of Sentiment in Credit Origination

47 Pages Posted: 8 Jan 2016 Last revised: 19 Mar 2016

See all articles by Kristle Romero Cortés

Kristle Romero Cortés

UNSW Australia Business School, School of Banking and Finance

Ran Duchin

Boston College - Carroll School of Management

Denis Sosyura

Arizona State University

Date Written: January 7, 2016

Abstract

Using daily fluctuations in local sunshine as an instrument for sentiment, we study its effect on day-to-day decisions of lower-level financial officers. Positive sentiment is associated with higher credit approvals, and negative sentiment has the opposite effect of a larger magnitude. These effects are stronger when financial decisions require more discretion, when reviews are less automated, and when capital constraints are less binding. The variation in approval rates affects ex post financial performance and produces significant real effects. Our analysis of the economic channels suggests that sentiment influences managers' risk tolerance and subjective judgment.

Keywords: behavioral finance, managerial biases, mood, sentiment, weather

JEL Classification: D03, G02

Suggested Citation

Cortés, Kristle Romero and Duchin, Ran and Sosyura, Denis, Clouded Judgment: The Role of Sentiment in Credit Origination (January 7, 2016). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2712634

Kristle Romero Cortés (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Ran Duchin

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Denis Sosyura

Arizona State University ( email )

Tempe, AZ 85287-3706
United States

HOME PAGE: http://www.public.asu.edu/~dsosyura/

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