Do Actions Follow Words? How bank sentiment predicts credit growth

This paper constructs a forward-looking bank managerial sentiment index by using earnings call transcripts of US, Canadian, and European banks from 2001 to 2021. First, we validate this index through regressions showing its predictive power for positive stock returns and earnings forecast revisions. Second, we analyze whether managerial sentiment predicts bank credit growth. We find that a one standard deviation increase in the index of future sentiment leads to a 1.85% rise in credit growth over the next year. The results remain robust to various controls and competing explanations, including managers catering to analysts’ expectations and macroeconomic expectations.