Information and Incentives Inside the Firm: Evidence from Loan Officer Rotation

Hertzberg, Andrew; Liberti, José María; Paravisini, Daniel

doi:10.1111/j.1540-6261.2010.01553.x

Cited by 242 publications

(131 citation statements)

References 53 publications

(58 reference statements)

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“…For example, "a fads-and-fashions effect can influence loan officers who may prefer to lend to firms in exciting or innovative industries even if industry performance indicators suggest otherwise" (McNamara & Bromiley, 1997, p. 1070. Hertzberg, Liberti, and Paravisini (2010) showed empirically that loan officers might have an information bias and strong risk aversion. Using data from a large multinational U.S. bank operating in Argentina, they concluded that loan officer, who is responsible for forecasting the borrower's creditworthiness and reporting information about them, reveals negative information about their borrowers' repayment prospects because of the threat of job rotation.…”

Section: Loan Officers' Subjective Judgment: Noise or New Informationmentioning

confidence: 99%

Evaluating the predictive accuracy of microloan officers’ subjective judgment

Baklouti¹,

Baccar²

2013

IJRSM

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The peculiarity in lending methodology in Microfinance institution characterized by unchallenged dominance of the loan officers in the decision-making prompted us to investigate the predictive accuracy of their subjective judgement. In addition, we investigate if the accuracy of this information depends on the strength of lenders-borrowers relationship.The objective of this paper is to understand the loan officer behaviour in default prediction task. Using credit file data from Tunisian Microfinance bank, we have found evidence that subjective judgment of loan officers has statistically significant predictive capability of default risk. In addition, our results suggest that novice loan officers have incorrect prediction of future default events because they are prone to different behavioral biases. Novice loan officers may overweight any information that is consistent with their existing beliefs and overestimate the precision of their own private information. However, through learning experienced loan officers have less behavior bias and more accurate feeling allowing them to make an accurate default prediction. To make correct decision in relationship lending approach, credit committee can rely on subjective judgment of experienced loan officers mainly when the latter judged the creditworthiness of frequent borrowers. As soft information is not easily and accurately transferable, Microfinance institutions have more interest to retain their experienced loan officers than their borrowers.

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Section: Loan Officers' Subjective Judgment: Noise or New Informationmentioning

confidence: 99%

Evaluating the predictive accuracy of microloan officers’ subjective judgment

Baklouti¹,

Baccar²

2013

IJRSM

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“…In many banks in Japan, loan officers rotate (i.e., transfer from one branch to another) every 2–5 years, which is driven by regulatory guidance (Uchida, Udell, and Yamori ). In a large multinational bank in Argentina, turnover is made within 3 years (Hertzberg, Liberti, and Paravisini ).…”

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confidence: 99%

The Repository of Soft Information within Bank Organizations

Hattori¹,

Shintani²,

Uchida³

2015

J of Money Credit Banking

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We examine who is the repository of soft information within bank organizations. Inconsistent with the conventional view of loan officers as the sole repository, we find that branch managers have the most soft information. We also find the repository at a higher hierarchical level at smaller banks. Furthermore, our evidence suggests that branch managers themselves actively collect soft information, especially at smaller banks. These findings suggest the need for a more nuanced view beyond the conventional emphasis on loan officers, and call for studies on the equilibrium design of the collection, processing, and use of soft information within bank organizations.JEL codes: D2, D8, L2, G21

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“…It can reduce credit availability for small firms (Scott, ). However, Hertzberg, Liberti, and Paravisini () do not share the same opinion: Studying the Argentinian branch of a large multinational American bank where a 3‐year rotation rule was applied for loan officers, the authors showed that this rotation policy may improve transfer of information within the bank. Indeed, when loan officers fear to be rotated, they will be more inclined to disclose bad news about the creditworthiness of their clients because they do not want their substitutes to do it themselves.…”

Section: Literature Reviewmentioning

confidence: 99%

Relationship lending in microfinance: How does it impact client dropout?

Godfroid

2019

Strategic Change

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A close relationship between microfinance loan officers and their clients is essential to avoid the phenomenon of client dropout. Client retention has been identified as a critical factor for both the social performance and the financial sustainability of microfinance institutions. Relationship lending in microfinance decreases the probability of clients dropping out, showing the importance of close contacts between loan officers and their clients. We recommend that microfinance practitioners avoid the rotation of loan officers through different branches when the risk of fraud from loan officers is low.

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Information and Incentives Inside the Firm: Evidence from Loan Officer Rotation

Cited by 242 publications

References 53 publications

Evaluating the predictive accuracy of microloan officers’ subjective judgment

Evaluating the predictive accuracy of microloan officers’ subjective judgment

The Repository of Soft Information within Bank Organizations

Relationship lending in microfinance: How does it impact client dropout?

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