IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Internal Control and Strategic Communication within Firms – Evidence from Bank Lending

Listed author(s):
  • Brown, Martin

    ()

  • Schaller, Matthias

    ()

  • Westerfeld, Simone

    ()

  • Heusler, Markus

    ()

The allocation of authority affects the communication of information about clients within banks. We document that in small business lending internal control leads loan officers to propose inflated credit ratings for their clients. Inflated ratings are, however, anticipated and partly reversed by the credit officers responsible for approving credit assessments. More experienced loan officers inflate those parameters of a credit rating which are least likely to be corrected by credit officers. Our analysis covers 10,568 internal ratings for 3,661 small business clients at six retail banks. We provide empirical support to theories suggesting that internal control can induce strategic communication within organizations when senders and receivers of information have diverging interests. Our findings also point to the limits of the four-eyes principle as a risk-management tool in financial institutions.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://ux-tauri.unisg.ch/RePEc/usg/sfwpfi/WPF-1504.pdf
Download Restriction: no

Paper provided by University of St. Gallen, School of Finance in its series Working Papers on Finance with number 1504.

as
in new window

Length: 47 pages
Date of creation: Feb 2015
Date of revision: Jul 2015
Handle: RePEc:usg:sfwpfi:2015:04
Contact details of provider: Phone: +41 71 243 40 11
Fax: +41 71 243 40 40
Web page: http://www.unisg.ch/de/universitaet/schools/finance

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
  2. Navin Kartik, 2009. "Strategic Communication with Lying Costs," Review of Economic Studies, Oxford University Press, vol. 76(4), pages 1359-1395.
  3. Thorsten Beck & Patrick Behr & Andre Guettler, 2013. "Gender and Banking: Are Women Better Loan Officers?," Review of Finance, European Finance Association, vol. 17(4), pages 1279-1321.
  4. Shawn Cole & Martin Kanz & Leora Klapper, 2012. "Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers," Harvard Business School Working Papers 13-002, Harvard Business School.
  5. Florian Heider & Roman Inderst, 2012. "Loan Prospecting," Review of Financial Studies, Society for Financial Studies, vol. 25(8), pages 2381-2415.
  6. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
  7. Sumit Agarwal, 2010. "Distance and Private Information in Lending," Review of Financial Studies, Society for Financial Studies, vol. 23(7), pages 2757-2788, July.
  8. Wouter Dessein, 2002. "Authority and Communication in Organizations," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 811-838.
  9. Jose M. Liberti & Atif R. Mian, 2009. "Estimating the Effect of Hierarchies on Information Use," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4057-4090, October.
  10. Grunert, Jens & Norden, Lars & Weber, Martin, 2005. "The role of non-financial factors in internal credit ratings," Journal of Banking & Finance, Elsevier, vol. 29(2), pages 509-531, February.
  11. Andrew Hertzberg & Jose Maria Liberti & Daniel Paravisini, 2010. "Information and Incentives Inside the Firm: Evidence from Loan Officer Rotation," Journal of Finance, American Finance Association, vol. 65(3), pages 795-828, June.
  12. Uchida, Hirofumi & Udell, Gregory F. & Yamori, Nobuyoshi, 2012. "Loan officers and relationship lending to SMEs," Journal of Financial Intermediation, Elsevier, vol. 21(1), pages 97-122.
  13. Jeremy C. Stein, 2002. "Information Production and Capital Allocation: Decentralized versus Hierarchical Firms," Journal of Finance, American Finance Association, vol. 57(5), pages 1891-1921, October.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:usg:sfwpfi:2015:04. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Geraldine Frei)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.