Managerial sentiments, non-performing loans, and banks financial performance: A causal mediation approach

The existing literature on corporate disclosures suggests that managerial sentiments are the outcome of the firm's financial performance. We extend this line of research and examine how managerial sentiments emerge in the banks' annual reports are shaped by non-performing loans (NPLs). We use the causal mediation approach, where managerial sentiments are used as the outcome variable possibly affected directly by NPLs or through the mediation of financial performance. Using a sample of large banks from 16 emerging economies during 2007-2018, our casual mediation model results show that managerial sentiments are mainly affected by NPLs reported in banks' annual reports. In addition, the effect of NPLs on managerial sentiments is also mediated through financial performance; however, the effect is relatively low. Taken together, the managerial sentiments stemming from NPLs are particularly valuable for investors as the presentation of NPLs' direct information is inherently ambiguous and difficult to comprehend.