Lenders' decision strategies and loan structure decisions

Loan structure is an important component of the credit granting process. Lo an structure establishes the monitoring relationship between the borrower a nd lender, affects accounting choices made by the borrower, and influences perceptions of the riskiness of the borrower and lender. Inappropriate loan structures, particularly those that are too restrictive, are noisy signals that could have economic consequences for borrowers and lenders. Based on the theory of cost-benefit tradeoff in decision process selection, this art icle proposes that the level of decision process effort applied by a lender may affect loan structure restrictiveness. To test this hypothesis, profes sional loan officers analyzed financial and nonfinancial information of can didate borrowers and set preferred levels of collateral and covenants while their decision processes were captured using computerized process tracing. Consistent with the theory, results showed a negative association between loan structure restrictiveness and two aspects of decision process: the tim e spent evaluating information and the order in which information was exami ned (i.e., information search pattern). Loan structure restrictiveness was not associated with the amount of information examined, nor with lenders' r isk preferences or years of lending experience. These findings suggest that loan structure decisions may be contingent on the way loan officers analyz e information; The implications of these findings for lending research and practice are discussed. (C) 1999 Elsevier Science Inc. All rights reserved.