Do Relationships Matter? Evidence from Loan Officer Turnover

Authors: Alejandro Drexler & Antoinette Schoar, 2013

Abstract: We study the effect of employee turnover on measures of firm performance and client retention in a firm where employees have decentralized knowledge and personal relationships with their clients. Using exogenous shocks to the relationship between borrowers and loan-officers, we document that borrowers are less likely to receive new loans from the bank and are more likely to apply for credit from other banks when their original loan officers are absent. They are also more likely to miss payments or go into default. These costs are mitigated when the bank is able to facilitate knowledge transmission from the departing loan officers to a successor. However the sharing of knowledge does not happen when turnovers are unexpected as in the case of sick leaves, or when loan officers do not have incentives to transfer information, as in the case of dismissals.

Click here to read more.