Working Paper

Clouded Judgment: The Role of Sentiment in Credit Origination


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.

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

JEL Classification: D03; G02;

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Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers (Old Series)

Publication Date: 2016-01-07

Number: 1601

Pages: 49 pages