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Initiative, incentives and soft information: how does delegation impact the role of bank relationship managers?

Subject

Finance

Publishing details

Authors / Editors

Liberti J

Publication Year

2004

Abstract

This paper empirically examines how changes in the hierarchical structure of a large organization can affect incentives. The empirical analysis exploits a change in the hierarchical structure of the Corporate Division of a private foreign commerical bank in Argentina between 1999 and 2001. Using detailed hand collected data on credit approvals, as well as perceived effort measures for each relationship manager from quality surveys done to borrowing firms, I test whether delegation of authority and reduction of oversight improves or decreases the provision of effort by account managers. Results suggest that "empowering managers" increases the time relationship managers spend with their corporate clients. Alternative explanations and several tests are constructed to examine the different channels through which effort measures could have increased other than the change in organizational sturucture. I then test whether the improvement is really because managers make better use of their decision making authority rather than they simply waste less time in filing reports to their superiors. I find that individuals who receive more authority use their soft information more compared to individuals to whom authority is only partially delegated. This suggests that delegation of authority increases managerial effort not only because management spends less time reporting to bosses, but also because they recognize that their effort will have greater impact on outcomes. Hence, transmission of, and reliance on, soft information are higher under decentralized than centralized structures. Finally, I test whether the change in structure was meaningful and productive from the bank's financial perspective. I find that cross-selling measures and bank's financial ratios increased after the organizational change.

Publication Research Centre

Institute of Finance and Accounting

Series Number

FIN 404

Series

IFA Working Paper

Available on ECCH

No


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