Do relationships matter? Evidence from loan officer turnover

We show that the cost of employee turnover in firms that rely on decentralized knowledge and personal relationships depends on the firms' planning horizons and the departing employees' incentives to transfer information. Using exogenous shocks to the relationship between borrowers and loan officers, we document that borrowers whose loan officers are on leave are less likely to receive new loans from the bank, are more likely to apply for credit from other banks, and are more likely to miss payments or go into default. These costs are smaller when turnover is expected, as in the case of maternity leave, or when loan officers have incentives to transfer information, as in the case of voluntary resignations. Keywords: information; incentives; corporate finance; banking; intermediation; organizational studies; performance History: Received May 23, 2013; accepted January 14, 2014, by Wei Jiang, finance. Published online in Articles in Advance August 1, 2014.
1. Introduction The recent management literature has documented that modern firms rely heavily on human capital-intensive technologies and flatter organizational structures, which allows authority and responsibility to be delegated more [...]