Monitoring and the Portability of Soft Information

by Dennis Campbell & Maria Loumioti

Overview — This study examines the "portability" of soft information within a decentralized financial institution. Using a unique dataset on loans from a large credit union and employees' notes summarizing their interactions with borrowers, the authors provide new insights on the portability of soft information within organizations, focusing in particular on an internal monitoring system used at this field site which, in effect, acts as a central repository of soft information gathered in the course of interactions between employees and customers. Contrary to the prevailing view that soft information lacks portability, results provide evidence that the "stock" of soft information accumulated in this system has persistent effects on the lending decisions of employees. Overall, findings indicate that the centralization of soft information acquired in past borrower-employee interactions can enable organizations to separate this informational asset from individual employees to facilitate future loan decisions. These results suggest that centralized information technology can alleviate the well-documented barriers of transmitting soft information consistent with economic theories on the role of centralization of information as a complement to decentralized decision-making. Key concepts include:

Portability of information means the extent to which it can be stored for, communicated to, and used over time and by employees other than those that originally acquired or produced the information.
Internal centralized information systems can facilitate the transmission of soft information across employees in different branches.
Findings complement the literature on the role of information systems as a means of improving information processing and coordinating decentralized decision-making within financial institutions.

Author Abstract

We study the portability of soft information in a decentralized financial institution. Theories from a variety of literatures suggest that difficulties in capturing, storing, and communicating soft information can inhibit its portability over time and across individuals within the organization. Using unique data on lending decisions made by employees in a highly decentralized financial services organization, we show that a monitoring system that captures soft information for vertical communication (to superiors) purposes also facilitates the horizontal communication of soft information (across employees) for decision-making purposes. Contrary to prevailing views on the limited portability of soft information, our results provide evidence that the "stock" of soft information accumulated in this system has persistent effects on the lending decisions of employees. We show that employees rely on this information to increase access to credit for borrowers, provide more favorable pricing terms, and reduce the ex-post risk of their lending decisions. These effects remain even when this information was acquired by employees other than the decision-maker, and they are not diminished by the physical separation of employees working in different business units.