Hostname: page-component-745bb68f8f-cphqk Total loading time: 0 Render date: 2025-01-20T17:33:30.592Z Has data issue: false hasContentIssue false
  • English
  • Français

Financial Incentives and Loan Officer Behavior: Multitasking and Allocation of Effort under an Incomplete Contract

Published online by Cambridge University Press:  30 April 2019

Patrick Behr ,
Alejandro Drexler ,
Reint Gropp  and
Andre Guettler Open the ORCID record for Andre Guettler [Opens in a new window]
Patrick Behr
Affiliation:
Behr, [email protected], EBAPE, Getulio Vargas Foundation
Alejandro Drexler
Affiliation:
Drexler, [email protected], Federal Reserve Bank of Chicago
Reint Gropp
Affiliation:
Gropp, [email protected], Halle Institute for Economic Research and University of Magdeburg
Andre Guettler*
Affiliation:
Guettler, [email protected], University of Ulm and Halle Institute for Econmic Research
*
Guettler (corresponding author), [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

We investigate the implications of providing loan officers with a nonlinear compensation structure that rewards loan volume and penalizes poor performance. Using a unique data set provided by a large international commercial bank, we examine the main activities that loan officers perform: loan prospecting, screening, and monitoring. We find that when loan officers are at risk of losing their bonuses, they increase prospecting and monitoring. We further show that loan officers adjust their behavior more toward the end of the month when bonus payments are approaching. These effects are more pronounced for loan officers with longer tenures at the bank.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 4 , June 2020 , pp. 1243 - 1267
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank an anonymous referee, Phil Dybvig, Jarrad Harford (the editor), Mrdjan Mladjan, Lars Norden, Klaus Schaeck, and Jerome Taillard; participants at the 2015 annual meetings of the American Finance Association, the European Finance Association, and the Swiss Society for Financial Market Research; and seminar participants at the Annual Meeting on Risk, Financial Stability, and Banking of the Brazilian Central Bank, Bank of Canada, Brazilian School of Public and Business Administration, Federal Reserve Bank San Francisco, Frankfurt School of Finance and Management, Fudan University, PUC Rio de Janeiro, and the World Bank for their comments. Part of this research was completed while Gropp was visiting the University of Amsterdam, the hospitality of which is greatly appreciated. A previous version of the article was entitled “Financial Incentives and Loan Officer Behavior.” The views expressed here do not reflect official positions of the Federal Reserve Bank of Chicago.

References

Agarwal, S., and Ben-David, I.. “Loan Prospecting and the Loss of Soft Information.” Journal of Financial Economics, 129 (2018), 608–628.Google Scholar
Andersson, P.“Does Experience Matter in Lending? A Process-Tracing Study on Experienced Loan Officers’ and Novices’ Decision Behavior.” Journal of Economic Psychology, 25 (2004), 471–492.Google Scholar
Baker, G. P.“Incentive Contracts and Performance Measurement.” Journal of Political Economy, 100 (1992), 598–614.Google Scholar
Balachandran, S.; Kogut, B.; and Harnal, H.. “Did Executive Compensation Encourage Extreme Risk-Taking in Financial Institutions?” Working Paper, Columbia Business School (2011).Google Scholar
Bebchuk, L., and Spamann, H.. “Regulating Bankers’ Pay.” Georgetown Law Journal, 98 (2010), 247–287.Google Scholar
Beck, T.; Behr, P.; and Guettler, A.. “Gender and Banking: Are Women Better Loan Officers?” Review of Finance, 17 (2013), 1279–1321.Google Scholar
Beck, T.; Behr, P.; and Madestam, A.. “Sex and Credit: Do Gender Interactions Matter for Credit Market Outcomes?” Journal of Banking and Finance, 87 (2018), 380–396.Google Scholar
Bénabou, R., and Tirole, J.. “Bonus Culture: Competitive Pay, Screening, and Multitasking.” Journal of Political Economy, 124 (2016), 305–370.Google Scholar
Berg, T.; Puri, M.; and Rocholl, J.. “Loan Officer Incentives, Internal Rating Models and Default Rates.” Working Paper, Duke University (2016).Google Scholar
Bolton, P.; Mehran, H.; and Shapiro, J.. “Executive Compensation and Risk Taking.” Review of Finance, 19 (2015), 2139–2181.Google Scholar
Brown, M.; Kirschenmann, K.; and Spycher, T.. “Numeracy and the Quality of On-the-Job Decisions: Evidence from Loan Officers.” Working Paper, University of St. Gallen (2017).Google Scholar
Cole, S.; Kanz, M.; and Klapper, L.. “Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers.” Journal of Finance, 70 (2015), 537–575.Google Scholar
Drexler, A., and Schoar, A.. “Do Relationships Matter? Evidence from Loan Officer Turnover.” Management Science, 60 (2013), 2722–2736.Google Scholar
Fahlenbrach, R., and Stulz, R.. “Bank CEO Incentives and the Credit Crisis.” Journal of Financial Economics, 99 (2011), 11–26.Google Scholar
Fisman, R.; Paravisini, D.; and Vig, V.. “Cultural Proximity and Loan Outcomes.” American Economic Review, 107 (2017), 457–492.Google Scholar
Gao, J.; Martin, X.; and Pacelli, J.. “Do Loan Officers Impact Lending Decisions? Evidence from the Corporate Loan Market.” Working Paper, Indiana University (2017).Google Scholar
Griffith, R., and Neely, A.. “Performance Pay and Managerial Experience in Multitask Teams: Evidence from within a Firm.” Journal of Labor Economics, 27 (2009), 49–82.Google Scholar
Heider, F., and Inderst, R.. “Loan Prospecting.” Review of Financial Studies, 25 (2012), 2381–2415.Google Scholar
Hertzberg, A.; Liberti, J. M.; and Paravisini, D.. “Information and Incentives inside the Firm: Evidence from Loan Officer Rotation.” Journal of Finance, 65 (2010), 795–828.Google Scholar
Hoffmann, F.; Inderst, R.; and Opp, M.. “Only Time Will Tell: A Theory of Deferred Compensation and Its Regulation.” Working Paper, Stockholm School of Economics (2018).Google Scholar
Holmstrom, B., and Milgrom, P.. “Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design.” Journal of Law, Economics & Organization, 7 (1991), 24–52.Google Scholar
Liberti, J. M., and Mian, A.. “The Effect of Hierarchies on Information Use.” Review of Financial Studies, 22 (2009), 4057–4090.Google Scholar
Mester, L.; Nakamura, L.; and Renault, M.. “Transactions Accounts and Loan Monitoring.” Review of Financial Studies, 20 (2007), 529–556.Google Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.Google Scholar
Norden, L., and Weber, M.. “Credit Line Usage, Checking Account Activity, and Default Risk of Bank Borrowers.” Review of Financial Studies, 23 (2010), 3665–3699.Google Scholar
Peek, J., and Rosengren, E.. “Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan.” American Economic Review, 95 (2005), 1144–1166.Google Scholar
Qian, J.; Strahan, P. E.; and Yang, Z.. “The Impact of Incentives and Communication Costs on Information Production: Evidence from Bank Lending.” Journal of Finance, 70 (2015), 1457–1493.Google Scholar
Stein, J.“Information Production and Capital Allocation: Decentralized versus Hierarchical Firms.” Journal of Finance, 57 (2002), 1891–1921.Google Scholar
Thompson, S. B.“Simple Formulas for Standard Errors That Cluster by Both Firm and Time.” Journal of Financial Economics, 99 (2011), 1–10.Google Scholar
Tzioumis, K., and Gee, M.. “Nonlinear Incentives and Mortgage Officers’ Decisions.” Journal of Financial Economics, 107 (2013), 436–453.Google Scholar