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In the data-driven world of lending, a personal relationship can still mean a better deal

Closeup shot of two two men shaking hands in an office
Credit: Peopleimages for iStock

In getting a good deal on a loan, numbers matter: Lenders look at companies’ financial statements and payback on past loans. Strong financial statements could mean a lower interest rate or better terms for the borrower.

But in the competitive landscape of loan acquisition, it’s not just about crunching numbers. Loan officers and borrowing managers are people, after all, and those who do repeat business build relationships and trust over time. The soft information accumulated in these relationships can reduce the costs of screening and monitoring, and thus reduce the cost of debt, according to new Berkeley Haas research.

“While two companies with the same credit score may appear similar on paper, our research shows that individual lending relationships can reveal important differences between them,” said Omri Even-Tov, assistant professor of accounting at the Haas School of Business. “These relationships foster trust and reduce information gaps, allowing lenders to gain valuable soft information about a borrower’s sense of responsibility and overall creditworthiness.”

Even-Tov’s forthcoming paper in the Review of Accounting Studies—coauthored by Xinlei Li of the Hong Kong University of Science and Technology, Hui Wang of the Renmin University of China, and Christopher Williams of the University of Michigan—shows that established relationships between a loan officer and a borrowing manager not only increase the likelihood of a loan, but tend to make the conditions of that loan better for the borrower without increasing risk for the lender.

These results, the researchers suggest, are increasingly important as technological innovation means fewer personal relationships in banking—and beyond.

Unique dataset

Even-Tov and his colleagues examined a sample of loans from between 1996 and 2016. They manually collected the signatures on these loans to determine the names of two key actors who are typically engaged in contracting negotiations and interact extensively. This laborious process allowed them to create a dataset comprising nearly 4,000 loans with 2,800 unique borrowing managers and 2,100 unique loan offices. The vast majority of these loans were one-off interactions, but some of them were conducted by the same loan officer and borrowing manager two or more times.

Comparing these groups, the researchers found that established relationships between lenders and borrowers proved favorable for both parties. For the borrowers, they led to better interest rates. For the lenders, they allowed for better screening and monitoring as evidenced by fewer rating downgrades.

The cost of turnover

They also found that when a borrowing manager and loan officer left their jobs, the two firms were roughly 70% less likely to engage in business together. These results were especially pronounced among smaller institutions, and with loan officers who manage fewer transactions, as these two groups rely more heavily on soft information accumulated in their relationships.

“This really quantifies a lot of anecdotal evidence about the importance of relationships, and it also sheds light on an underappreciated cost of turnover,” Even-Tov said. When an employee leaves a company, it’s a loss not only of their knowledge and skills, but their relationships, too. If a company loses its CFO, it has not only lost that distinct set of talents, but possibly the chance of getter better deals on loans. “Companies need to factor in these less-tangible assets of their employees.”

Decline in professional relationships

Even-Tov highlighted two related implications raised by this paper: New technological tools are driving a decline in professional relationships, and this is happening in industries beyond banking. He gave the auditing industry as an example. Auditors in previous years would be embedded in clients’ offices. They got to know the companies they were auditing, and the people who worked there. Today, a great deal of auditing is done remotely, or even automatically. The same is true for consulting, real estate, venture capital, and private equity. 

“We need to think about what we lose when technologies allow us to bypass the need for interaction between individuals,” Even-Tov said. “There are advantages to doing this work more quickly or from a distance, of course. But these changes also introduce costs, and this work makes some of those costs clear.”

 

Read the paper:

The Importance of Individual-Pair Lending Relationships
By Omri Even-Tov, Xinlei Li, Hui Wang, and Christopher Williams
Review of Accounting Studies (forthcoming)

 

Berkeley Haas ranked #1 for finance research

student walking toward faculty building at Haas with campanille in back
Photo Copyright Noah Berger / 2021.

The Haas School of Business at the University of California, Berkeley has been ranked #1 for finance research among almost 150 business schools worldwide in a new global research ranking.

The ranking is based on publications in the top six finance journals as well as a host of other top-tier economics, finance, and business journals from 2000 to 2023. It was prepared by the Olin Wells Fargo Advisors Center for Finance and Accounting Research at Washington University in St. Louis.

Berkeley Haas finance faculty came out on top for per-capita research output over the 23-year period. On average, they published .71 papers in top journals every year.

“We know that our finance faculty is incredibly strong, and this is quantifiable proof that they are true rock stars,” said Dean Ann Harrison. “We are very proud of the strength and influence of our finance researchers.”

The ranking considers articles published only by finance professors, as well as non-finance professors who have published at least three papers in the top three finance journals. 

“Our group provides cutting-edge research in finance, and this ranking is a testament to it,” said Associate Professor David Sraer, chair of the Finance Group. “Given our brilliant junior faculty, I am confident this trend will continue in the future!”

Trailblazing R. Martin Chavez on what makes a successful professional life

Growing up in Albuquerque, N.M., R. Martin (Marty) Chavez relied on his mother’s wisdom to help him forge his personal and professional identities.

“I remember sitting around the dinner table and by brother said, ‘I want to do something that helps Hispanics,’” Chavez said at an April Haas Dean’s Speaker Series event, co-sponsored by the Berkeley Culture Center. “My mom said, ‘that’s the dumbest thing I’ve ever heard. If you really want to help Hispanics, be really successful and be really visible, and that’s the way you can help Hispanics.’”

Chavez went on to do just that. After serving in a variety of senior roles at the investment banking company Goldman Sachs, he is now vice chairman and partner of Sixth Street, a San Francisco-based global investment firm.

A trailblazer who was among the most senior openly gay Latino Wall Street executives, Chavez helped turn trading into a software business by using data-based modeling.

“One thing that Goldman taught me is we don’t predict the future, because we can’t,” Chavez said. “Anyone who’s predicting the future is a charlatan.” Instead, he said, focus on having a “really deep model of what is going on right now, and then you can inspect that model and maybe you’ll find things that can go wrong in the future.”

A successful professional life, Chavez added, is about striking a work-life balance.

“There is just your life, and your short, sacred list of personal priorities,” he said. “Know those priorities. Make every choice according to the waterfall of your priorities.” Chavez shared his priorities, which start with “peace of mind” (which includes sleep and meditation), family, and then work.

“If (work) is not on your top-three list of priorities, you’re in the wrong company,” Chavez said.

Watch the conversation on Youtube.