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Making Sense of Soft Information: Interpretation Bias and Ex-Post Lending Outcomes

73 Pages Posted: 24 Mar 2017 Last revised: 20 Sep 2017

Dennis Campbell

Harvard University - Accounting & Control Unit

Maria Loumioti

The University of Texas at Dallas

Regina Wittenberg Moerman

University of Southern California

Date Written: March 1, 2017

Abstract

We explore how cognitive constraints can impede the effective processing and interpretation of less salient, non-quantitative (soft) information in private lending. Taking advantage of the internal reporting system of a large federal credit union, we delineate four important constraints likely to affect the lending process: (1) limited attention (or distraction), (2) task-specific human capital, (3) peer perception and (4) learning over the credit cycle. Specifically, we find that utilizing soft information in lending decisions leads to worse credit outcomes when loan officers are busy or before weekends and national holidays; when loan officers had earlier non-banking and, in particular, sales-related experience; when both officers and borrowers are men and when loan officers are members of informal organizational networks; and during periods of credit expansion. Overall, we provide novel evidence of non-agency-related costs in the use of soft information in credit decisions.

Keywords: Soft information, credit outcomes, cognitive constraints, interpretation and processing bias

JEL Classification: D03, D12, D19, G21

Suggested Citation

Campbell, Dennis and Loumioti, Maria and Wittenberg Moerman, Regina, Making Sense of Soft Information: Interpretation Bias and Ex-Post Lending Outcomes (March 1, 2017). Available at SSRN: https://ssrn.com/abstract=2939881

Dennis Campbell

Harvard University - Accounting & Control Unit ( email )

Soldiers Field
Boston, MA 02163
United States

Maria Loumioti (Contact Author)

The University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Regina Wittenberg Moerman

University of Southern California ( email )

Los Angeles, CA 90089
United States

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