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Clouded Judgment: The Role of Sentiment in Credit Origination

Kristle Cortes, Ran Duchin and Denis Sosyura

No 1601, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

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; managerial biases; mood; sentiment; weather (search for similar items in EconPapers)
JEL-codes: D03 G02 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2016-01-07
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