Lenders' decision strategies and loan structure decisions

Loan structure is an important component of the credit granting process. Loan structure establishes the monitoring relationship between the borrower and 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 article proposes that the level of decision process effort applied by a lender may affect loan structure restrictiveness. To test this hypothesis, professional loan officers analyzed financial and nonfinancial information of candidate 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 time spent evaluating information and the order in which information was examined (i.e., information search pattern). Loan structure restrictiveness was not associated with the amount of information examined, nor with lenders' risk preferences or years of lending experience. These findings suggest that loan structure decisions may be contingent on the way loan officers analyze information. The implications of these findings for lending research and practice are discussed. J BUSN RES 1999. 46.83-94.