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Clouded Judgment: The Role of Sentiment in Credit Origination

Author

Listed:
  • Kristle Romero Cortes
  • Denis Sosyura
  • Ran Duchin

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 & Denis Sosyura & Ran Duchin, 2016. "Clouded Judgment: The Role of Sentiment in Credit Origination," Working Papers (Old Series) 1601, Federal Reserve Bank of Cleveland, revised 07 Jan 2016.
  • Handle: RePEc:fip:fedcwp:1601
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Chhaochharia, Vidhi & Kim, Dasol & Korniotis, George M. & Kumar, Alok, 2019. "Mood, firm behavior, and aggregate economic outcomes," Journal of Financial Economics, Elsevier, vol. 132(2), pages 427-450.
    2. Ulrike Malmendier, 2018. "Behavioral Corporate Finance," NBER Working Papers 25162, National Bureau of Economic Research, Inc.
    3. Marko Jakšič & Matej Marinč, 2019. "Relationship banking and information technology: the role of artificial intelligence and FinTech," Risk Management, Palgrave Macmillan, vol. 21(1), pages 1-18, March.

    More about this item

    Keywords

    behavioral finance; sentiment; mood; weather; managerial biases;

    JEL classification:

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

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