ESCALATION AT THE CREDIT WINDOW - A LONGITUDINAL-STUDY OF BANK EXECUTIVES RECOGNITION AND WRITE-OFF OF PROBLEM LOANS

Although the escalation literature has grown steadily over the past 20 years, there has been very little research bridging the gap between l aboratory experiments and qualitative field studies on escalation. Wha t has been missing are quantitative tests of escalation hypotheses in their natural context. This study helps fill such a gap by testing the responsibility hypothesis within the banking industry. It was predict ed that the turnover of senior bank managers would lead to a deescalat ion of commitment to problem loans. Data collected from 132 California banks over a 9-year period showed that bank executive turnover predic ted both provisions for loan losses and the write-off of bad loans. In contrast, provisions and write-offs were not found to influence execu tive turnover. The implications of these results are discussed in term s of both the escalation literature and practical ways to improve deci sion making in the banking industry.