Can soft information survive organizational distance? Evidence from SMB lending

This paper examines whether and how soft information in corporate loan applications influences the lending decision process, and whether organizational frictions moderate this influence. In this context, soft information refers to the text data collected, analyzed, and transmitted by loan officers to the bank’s headquarters. Using a proprietary dataset from a large European bank, the study finds that soft information impacts both the outcomes and the speed of lending decisions. However, this effect is moderated by the organizational distance between the loan officer and the bank’s headquarters. Additionally, we provide evidence that soft information embedded in comments serves as a strong predictor of company defaults, supporting its use in lending to small and medium-sized businesses (SMBs), particularly when branches are distant from the bank’s headquarters. Our findings remain robust across additional analyses and tests, consistent with the presence of communication frictions within banking organizations that hinder the effective "hardening" of soft information as organizational distance increases.