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Loan Prospecting and the Loss of Soft Information

57 Pages Posted: 26 Apr 2012 Last revised: 16 Jul 2017

Sumit Agarwal

Georgetown University - Department of Finance

Itzhak Ben-David

Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)

Date Written: January 2017

Abstract

We study a controlled experiment in which a bank’s loan officers were incentivized based on originated loan volume to encourage prospecting for new business. While treated loan officers did attract new applications, both extensive and intensive margins of loan origination expanded ( 31% new loans; loan size 15%). We find that loan officers gave greater weight to hard information in approval decisions. Despite no change in the observable characteristics of approved loans, their default rate increased ( 24%). Finally, the bank’s imputed credit-default model lost its predictive power. Overall, loan-prospecting incentives led to unfavorable soft information being overlooked in the origination process.

Keywords: loan officers, loan prospecting, information production, banking, soft information, big data, credit default model

JEL Classification: G01, G21

Suggested Citation

Agarwal, Sumit and Ben-David, Itzhak, Loan Prospecting and the Loss of Soft Information (January 2017). Journal of Financial Economics (JFE), Forthcoming; Fisher College of Business Working Paper No. 2012-03-07; Charles A. Dice Center Working Paper No. 2012-7. Available at SSRN: https://ssrn.com/abstract=2046696 or http://dx.doi.org/10.2139/ssrn.2046696

Sumit Agarwal

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-8207 (Phone)

HOME PAGE: http://www.ushakrisna.com

Itzhak Ben-David (Contact Author)

Ohio State University - Fisher College of Business, Finance Department ( email )

2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

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