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Clouded judgment: The role of sentiment in credit origination

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  • Cortés, Kristle
  • Duchin, Ran
  • Sosyura, Denis

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.

Suggested Citation

  • Cortés, Kristle & Duchin, Ran & Sosyura, Denis, 2016. "Clouded judgment: The role of sentiment in credit origination," Journal of Financial Economics, Elsevier, vol. 121(2), pages 392-413.
    • Handle: RePEc:eee:jfinec:v:121:y:2016:i:2:p:392-413
    DOI: 10.1016/j.jfineco.2016.05.001
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    More about this item

    Keywords

    Behavioral finance; Managerial biases; Mood; Sentiment; Weather;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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