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Clouded Judgment: The Role of Sentiment in Credit Origination

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  • Kristle Romero Cortes
  • Ran Duchin
  • Denis Sosyura

Abstract

Using daily fluctuations in local sunshine as an instrument for sentiment, we study its effect on day-today 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

  • Kristle Romero Cortes & Ran Duchin & Denis Sosyura, 2016. "Clouded Judgment: The Role of Sentiment in Credit Origination," Working Papers (Old Series) 1601, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:1601
    DOI: 10.26509/frbc-wp-201601
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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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