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Making sense of soft information: interpretation bias and loan quality

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  • Campbell, Dennis
  • Loumioti, Maria
  • Wittenberg-Moerman, Regina

Abstract

We explore whether cognitive constraints and behavioral biases impede the processing and interpretation of soft information in private lending. Using data from a credit union's internal reporting system, we delineate three constraints and biases likely to affect lending decisions: limited attention, task-specific human capital and common identity. We find that soft information leads to worse loan quality when loan officers are busy or before weekends and around national holidays; when they have prior sales experience; and when both the officers and borrowers are men. We provide evidence of non-agency-related costs in the use of soft information in lending decisions.

Suggested Citation

  • Campbell, Dennis & Loumioti, Maria & Wittenberg-Moerman, Regina, 2019. "Making sense of soft information: interpretation bias and loan quality," Journal of Accounting and Economics, Elsevier, vol. 68(2).
  • Handle: RePEc:eee:jaecon:v:68:y:2019:i:2:s0165410119300357
    DOI: 10.1016/j.jacceco.2019.101240
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