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

48 Pages Posted: 7 Mar 2015 Last revised: 8 Sep 2015

See all articles by Martin Brown

Martin Brown

University of St. Gallen

Matthias Schaller

Risk Solution Network AG

Simone Westerfeld

University of St. Gallen (HSG), School of Finance

Markus Heusler

Risk Solution Network AG

Date Written: February 23, 2015

Abstract

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.

Keywords: Internal Control, Authority, Information, Small Business Lending

JEL Classification: D23, G21, G34, L20, M2.

Suggested Citation

Brown, Martin and Schaller, Matthias and Westerfeld, Simone and Heusler, Markus, Internal Control and Strategic Communication within Firms – Evidence from Bank Lending (February 23, 2015). University of St.Gallen, School of Finance Research Paper No. 2015/04. Available at SSRN: https://ssrn.com/abstract=2574279 or http://dx.doi.org/10.2139/ssrn.2574279

Martin Brown (Contact Author)

University of St. Gallen ( email )

Unterer Graben 21
St. Gallen, CH-9000
Switzerland

Matthias Schaller

Risk Solution Network AG ( email )

Albisriederstrasse 80a
Zurich, Zurich 8003
Switzerland

Simone Westerfeld

University of St. Gallen (HSG), School of Finance ( email )

Dufourstrasse
St. Gallen, 9000
Switzerland

Markus Heusler

Risk Solution Network AG ( email )

Albisriederstrasse 80a
Zurich, Zurich 8003
Switzerland

Register to save articles to
your library

Register

Paper statistics

Downloads
171
Abstract Views
869
rank
173,897
PlumX Metrics