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

Item Type Monograph (Working Paper)
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.

Authors Brown, Martin; Schaller, Matthias; Westerfeld, Simone & Heusler, Markus
Language English
Keywords Internal Control, Authority, Information, Small Business Lending
Subjects business studies
HSG Classification contribution to scientific community
Refereed No
Date 2015
Publisher SoF-HSG
Place of Publication St.Gallen
Series Name School of Finance Working Paper Series
Number 2015/04
Depositing User Prof. Dr. Martin Brown
Date Deposited 05 Mar 2015 14:11
Last Modified 23 Aug 2016 11:21
URI: https://www.alexandria.unisg.ch/publications/239687

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Citation

Brown, Martin; Schaller, Matthias; Westerfeld, Simone & Heusler, Markus: Internal Control and Strategic Communication within Firms - Evidence from Bank Lending. School of Finance Working Paper Series, 2015, 2015/04.

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https://www.alexandria.unisg.ch/id/eprint/239687
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