Communication frictions in banking organizations: Evidence from credit score lending

Trade credit and firm investments: empirical evidence from Italian cooperative banks

“…Local cooperative banks benefit from competitive advantages over nationwide banks, as the latter are afflicted by organizational complexity and more severe problems in communicating information (Berger et al 2005b ; Filomeni et al 2021 ). Indeed, the distance between the bank headquarters and local branches of nationwide banks gives rise to information frictions within the banking organization, because the bank headquarters are less able to interpret the information coming from distant branches than information from closer ones (Stein 2002 ; Liberti and Petersen 2019 ; Filomeni et al 2020 , 2021 ).…”

“…Indeed, the local bank participates to the local community life, thus collecting information not available to banks that operate at a distance (Angelini et al 1998 ; Stein 2002 ). Moreover, even if nationwide banks’ local branches may integrate borrowers’ hard information with valuable soft information collected locally, or if large complex banks use transaction lending technologies well-suited to SMEs such as credit scoring (Berger and Udell 2006 ; Ferri and Neuberger 2014 ), cooperative banks are still expected to benefit from an informational advantage in providing loans to local firms due to their engagement in relationship lending (Bolton et al 2016 ; Filomeni et al 2020 , 2021 ). Bartoli et al ( 2013 ) note that transactional lending, even when using sophisticated technologies, does not substitute for relationship banking in the granting of soft-information intensive loans to SMEs.…”

“…In this scenario, credit-constrained SME are oriented to turn to trade credit which is the most important alternative to bank lending as a source of external financing (Carbo’-Valverde et al 2016 ) in nearly every economy (Demirgüç-Kunt and Maksimovic 2002 ). 1 In contrast, larger firms are less likely to fall credit constrained as they tend to borrow from large financial institutions that mostly rely on hard information in their lending decisions (Filomeni et al 2020 , 2021 ; Stein 2002 ; Berger and Udell 2006 ). In this regard, Berger and Udell ( 2006 ) show that large institutions tend to lend to larger firms, while small institutions lend more to smaller firms based on stronger bank-firm relationships (Haynes et al 1999 ; Cole et al 2004 ; Scott 2004 ; Berger et al 2005b ).…”

Hardening soft information: does organizational distance matter?

“…Our findings also contribute to the literature on bank organization and soft information production and lending relationships. Consistently, a number of studies document that more hierarchical banks (or branches at a greater distance from the bank headquarters) produce and use less soft information (Scott, 2004;Berger et al, 2005;Uchida et al, 2012;Ogura and Uchida, 2014;Liberti, 2018, Skrastins andVig, 2018) and shy away from small business lending and softinformation-based credit relationships (Mian, 2006;Detragiache et al, 2008;DeYoung et al, 2008;Alessandrini et al, 2009Alessandrini et al, , 2010Presbitero and Zazzaro, 2011;Fiordelisi et al, 2014;Lee and Brown, 2017;Filomeni et al, 2020). More closely related to our research, Liberti and Mian (2009) analyze loans to large corporate customers made by a multinational bank in Argentina and find that the sensitivity of the approved loan amount to subjective, soft information declines as the geographical distance between the loan officer managing the loan application and the higher-ranked bank officer with the responsibility for the final lending decision increases, while sensitivity to objective, hard information is significantly higher for loans approved at a higher hierarchical distance.…”

Soft Information Production in Sme Lending

“…Research in relationship banking generally suggests that soft information can improve contracting efficiency and affect a firm's cost of and/or access to credit (see, e.g., Boot and Thakor ; Petersen and Rajan ; Berger and Udell ; Blackwell and Winters ; Elsas ; Peltoniemi ; Puri, Rocholl, and Steffen ; Bartoli et al ; Gobbi and Sette ; Beck et al ), collateral requirements (Chakraborty and Hu ; Brick and Palia ; Behr, Entzian, and Güttler ), and other important organizational features, such as the portability of soft information across organizational layers, delegation of the loan approval process (Liberti and Mian ; Degryse, Laeven, and Ongena ; Agarwal and Hauswald ; Nemoto, Ogura, and Watanabe ; Filomeni, Udell, and Zazzaro ), corporate governance (Dass and Massa ), and firm innovativeness (Giannetti ). Furthermore, the role of soft information is explicitly considered in the literature on banks that specialize in lending to small‐ and medium‐sized enterprises (SMEs) (Stein ; Berger and Udell ; Berger, Rosen, and Udell ; Delgado, Salas, and Saurina ; Berger and Black ; De la Torre, Martínez Pería, and Schmukler ).…”