Conservatism and Reporting Biases in Internal Decision Making: Empirical Evidence on Loan Approval Decisions
The quality of information is hard to judge. This study investigates how decision makers’ uncertainty about information quality affects the interaction between their information use and information supply using a dataset of used-car loan applications from a car dealership in Taiwan. Loan applications are submitted via either franchisees or company-owned outlets. The loan rate is the communication device through which salespeople influence loan officers’ approval decisions. I argue that loan officers are more uncertain about franchisees’ information quality than owned-outlets’, and expect that information uncertainty gives rise to both decision conservatism biases and reporting biases. Consistent with the decision conservatism hypothesis, I find that loan officers, in response to an increase in the loan rate, are more likely to reject franchisees’ applications than owned-outlets’. Also, franchisees set a lower loan rate but have a higher default rate than owned-outlets. This finding supports the reporting biases hypothesis; salespeople bias loan rates downward to offset loan officers’ conservatism biases.
This seminar is organised by the Erasmus Accounting Research Group.