Clouded judgment: The role of sentiment in credit origination

Kristle Cortés, Ran Duchin, Denis Sosyura

Research output: Contribution to journalArticlepeer-review

16 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)392-413
Number of pages22
JournalJournal of Financial Economics
Volume121
Issue number2
DOIs
StatePublished - Aug 1 2016
Externally publishedYes

Keywords

  • Behavioral finance
  • Managerial biases
  • Mood
  • Sentiment
  • Weather

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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