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The Impact of Incentives and Communication Costs on Information Production and Use: Evidence from Bank Lending
Author(s) -
QIAN JUN QJ,
STRAHAN PHILIP E.,
YANG ZHISHU
Publication year - 2015
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12251
Subject(s) - incentive , loan , business , participation loan , production (economics) , shock (circulatory) , officer , work (physics) , bridge loan , finance , economics , non performing loan , microeconomics , medicine , mechanical engineering , political science , law , engineering
In 2002 and 2003, many Chinese banks implemented reforms that delegated authority to individual loan officers. The change followed China's entrance into the WTO and offers a plausibly exogenous shock to loan officer incentives to produce information. We find that the bank's internal risk rating becomes a stronger predictor of loan interest rates and ex post outcomes after reform. When the loan officer and the branch president who approves the loan work together longer, the rating also becomes more strongly related to loan prices and outcomes. Our results highlight how incentives and communication costs affect information production and use.