Estimating the Effect of Hierarchies on Information Use

Abstract

Theory suggests that greater hierarchical distance between a subordinate and his boss makes it more difficult to share abstract and subjective information in decision making. A novel data set put together from credit dossiers of large corporate loan applicants enables us to observe the information collected by loan officers and also how it is used by the ultimate loan approving officer. We find that greater hierarchical / geographical distance between the information collecting agent and the loan approving officer leads to less reliance on subjective information and more on objective information. By exploiting non-linearities in the "assignment rules" that determine an applicant's hierarchical distance, and using information collecting agent fixed effects, we show that our result cannot be driven by endogenous assignment of applicants. We also find that higher frequency of interactions between the information collecting agent and loan approving officer, both over time and through geographical proximity, helps mitigate the effects of hierarchical distance on information use. Our results show that hierarchical distance influences information use, and highlights the importance of "human touch" in communication.

Vive la Différence: Social Banks and Reciprocity in the Credit Market

“…Moreover, the distance between the branches and La Nef's headquarters varies. Distance could indeed matter in communicating soft information to the credit committee (Liberti and Mian, 2009). 28 In Columns (7) and (8), we take into account the borrower's location (town, rural area or suburb).…”

Bank Financing for SMEs: Evidence Across Countries and Bank Ownership Types

“…Until recently, the conventional wisdom regarding SME finance was that small and domestic private banks are more likely to finance SMEs because they are better suited to engage in "relationship lending", a type of financing based primarily on "soft" information gathered by the loan officer through continuous, personalized, direct contacts with SMEs, their owners and managers, and the local community in which they operate (see Berger et al 1995Berger et al , 2001Keeton 1995;Berger and Udell 1996;and Strahan and Weston 1996;Mian 2006;and Sengupta 2007). Also, studies such as Stein (2002), Mian (2006), Canales and Nanda (2008), and Liberti and Mian (2009) have argued that more centralized and hierarchical organizational structures can have a negative impact on lending to opaque borrowers, such as SMEs. However, some recent studies (see Berger and Udell 2006;Berger et al 2007;and de la Torre et al 2010) have begun to dispute this conventional wisdom and propose a new paradigm for bank SME finance, arguing that large and foreign banks can be as effective in SME lending through arms-length lending technologies (e.g., asset-based lending, factoring, leasing, fixed-asset lending, credit scoring, etc.)…”

Information, Credit, and Organization

“…The hierarchy of authority has several levels, with the loan officer at level 1 and the division manager at level 2. The level of authority depends on the loan amount involved, as well as other observable characteristics, such as amount and type of collateral and maturity (for more details, see Liberti and Mian [2009]). A loan typically requires about two layers of approval, with the range between 1 and 7.…”

“…Each program involves scouting roughly [20][21][22][23][24][25][26][27][28][29][30] prospective borrowers every quarter. We track how this task changes for a division manager after the credit registry expansion in column (5) of Table 3.…”