Loan Prospecting and the Loss of Soft Information

57 Pages Posted: 3 Mar 2014

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: February 2014

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.

Suggested Citation

Agarwal, Sumit and Ben-David, Itzhak, Loan Prospecting and the Loss of Soft Information (February 2014). NBER Working Paper No. w19945. Available at SSRN: https://ssrn.com/abstract=2403669

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

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

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance ( 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/

Register to save articles to
your library

Register

Paper statistics

Downloads
58
rank
342,852
Abstract Views
852
PlumX Metrics