The effect of delegation of decision rights and control: The case of lending decisions for small firms

Bouwens, Jan and Kroos, Peter,(2019), The effect of delegation of decision rights and control: The case of lending decisions for small firms. , Management Accounting Research, Elsevier Ltd

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We examine the effect of the allocation of decision rights on loan outcomes using proprietary data from a bank. Given that loan officers accumulate soft, nonverifiable information about borrowers through repeated interactions over time, our bank grants decision rights on some loans to loan officers. For larger and risky loans, the bank centralizes decision rights to assure that those loans are diversified across industries. When loans require approval from higher-level officers, loan officers must communicate their accumulated information with higherlevel officers. Given that loan officers are incentivized to make loans irrespective of who has the discretion to grant the loan, internal disclosure of soft information appears to come at a cost. Relative to loans where loan officers have discretion, loans that require approval from higher hierarchical levels feature: (1) greater discounts on standard loan rates, and (2) a greater likelihood of a loan quality downgrade in the period following approval. Our evidence suggests that the incentive for loan officers to make loans, in combination with the necessity for higher ranked-officers to rely on soft information in their loan decisions, creates conditions in which information reported by loan officers may become optimistically biased.
Keywords : Allocation of decision rights Non-verifiable information Management control Incentives Biased reporting, UNSPECIFIED
Journal or Publication Title: Management Accounting Research
Volume: 43
Item Type: Article
Subjects: Manajemen
Depositing User: Arief Eryka Zendy
Date Deposited: 20 Dec 2019 06:31
Last Modified: 20 Dec 2019 06:31

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