Bank Management Sentiment and Liquidity Hoarding

Abstract

We analyze how bank management sentiment affects liquidity hoarding. Our newly-created sentiment measure derives bank manager sentiment from language in banks’ annual reports (10-Ks). We find banks with more negative management sentiment hoard liquidity beyond what is warranted by their own conditions and external circumstances faced. Our results also suggest that this tendency varies with bank characteristics and time periods. Further analysis implies that our findings incorporate bank volition at least to some degree, rather than being driven only by customers. Our findings are robust to using exogenous weather conditions to instrument for sentiment. We also discuss potential policy implications.

Keywords: bank sentiment, liquidity hoarding, textual analysis, bank disclosure

JEL Classification: G21, G02, D03