International College of Economics and Finance

ICEF/LFE Research Seminar by Martin Brown (University of St. Gallen)

On Tuesday, May 20 at 4.40 pm International College of Economics and Finance and International Labouratory of Financial Economics held a research seminar in Finance.
Speaker: Martin Brown (University of St. Gallen)

Theme: «The Hidden Costs of Control– Evidence from Small Business Lending»
Venue:  Shabolovka st., 26, room 3209

Abstract:  Using proprietary data on 3,360 credit assessments by 340 loan-officers at six banks, we analyze how internal control affects the credit rating process. We document a positivity bias of control: Loan officers propose better ratings for their clients when they know that the rating is subject to internal approval. Our evidence suggests that this positivity bias is driven by strategic behavior: Loan officers inflate proposed ratings in reaction to past downward corrections by their current approver. Moreover, experienced loan officers inflate those parameters of a credit rating which are least likely to be corrected by approvers. Overall, we find that internal control does not improve the informational efficiency of the credit assessment process.

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