- The effect of organizational hierarchy on loan rates and risk assessments
- Number of pages
- Tilburg / Amsterdam: Tilburg University / University of Amsterdam
- Document type
- Working paper
- Faculty of Economics and Business (FEB)
- Amsterdam Business School Research Institute (ABS-RI)
We examine whether loan decisions are affected by the internal decision structure of the bank. Banks typically grant decision rights on straight-forward loans entirely to individual loan officers. For more risky loans these officers have to seek ratification for their loan proposals at higher hierarchical levels within banks (e.g., a credit committee). As banks typically provide loan officers with incentives to make loans, loan officers can increase the likelihood of loan approval by communicating the risk-return characteristics of the loan request favorably. Using internal records from a bank, our sample consists of approved loan requests coming from small firms. Our evidence suggests that loan contracts approved at higher hierarchical levels vis-à-vis those approved by loan officers feature lower loan rates and a greater likelihood of an adverse risk re-classification one year after the loan approval.
- January, 2012
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