Loan Prospecting and the Loss of Soft Information

Fisher College of Business Working Paper No. 2012-03-07

Charles A. Dice Center Working Paper No. 2012-7

50 Pages Posted: 26 Apr 2012 Last revised: 29 Apr 2016

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: April 28, 2016

Abstract

We study a controlled experiment in which bank’s loan officers were incentivized to prospect for new applications. The dollar volume of approved loans increased; however, we find that loan officers did not source new applications and that the expected default rate did not change. Instead, the bank relied on favorable hard information when approving loans and ignored unfavorable soft information. Furthermore, loan officers convinced approved applicants to borrow larger amounts. Both factors contributed to an ex post higher default rate and to the loss of the predictive power of the bank’s credit default model.

Keywords: loan officers, loan prospecting, information production, credit default model

JEL Classification: G01, G21

Suggested Citation

Agarwal, Sumit and Ben-David, Itzhak, Loan Prospecting and the Loss of Soft Information (April 28, 2016). 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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