Lost in Translation: The determinants and the effect of soft information dispersion in bank lending

In this paper, we examine who holds the decision-making power for credit approval in small business lending; we also examine the determinants of shifting this power from a local bank branch to an upper organizational level. Because soft information is usually collected by local branches, shifting the decision-making power may lead to a loss of soft information because it is difficult to transmit soft information across organizational levels. We find that when the local bank operates with a relationship lending strategy, it tends to handle loan requests, and soft information loss is less likely to occur. We also find that the probability of losing the soft information is much higher when the duration of the relationship is shorter and when borrowers undertake the relationship with a greater number of banks. In particular, our findings suggest that information loss is linked to borrower risk, as risky loans tend to be evaluated centrally. Furthermore, we observe that the organizational level at which loan requests are handled has a significant effect on the approval/rejection of a loan request.