Bank Management Sentiment and Liquidity Hoarding

Abstract

We analyze how bank managers’ sentiment affects bank liquidity hoarding, distinguishing unexplained beliefs (“sentiment”) from fundamental-based beliefs (“tone”). We employ a novel managerial sentiment measure from textual analysis of 10-Ks and utilize a comprehensive research-based bank liquidity hoarding measure. We find negative bank management sentiment results in additional liquidity hoarding not warranted by fundamental bank conditions or external circumstances, with real economy and financial system implications. Further analysis confirms that our findings reflect bank volition rather than being driven only by bank customers. We address endogeneity using exogenous weather conditions as instruments and draw potential policy implications.

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

JEL Classification: G21, G02, D03