Loan Officer Specialization, Borrower Information, and Credit Defaults

Abstract

This paper studies how organizational downsizing in a bank affects loan officer specialization and the credit default risk of small and medium-sized enterprises. We exploit a wave of early loan officer retirements as a quasi-natural experiment, in which the resulting borrower reallocations changed the industry specialization levels of the remaining loan officers. In a difference-in-differences analysis excluding all reallocated borrowers, we find that a negative shock to loan officer specialization causes an increase in default rates due to an inferior production of default risk information and excessive loan growth. A positive shock to loan officer specialization generates opposite effects.