Organizational design of financial institutions

Skrastins, J (2015) Organizational design of financial institutions. Doctoral thesis, University of London: London Business School.

Abstract

This thesis is structured around two main chapters which study organizational design of financial institutions. The first chapter of my thesis is based on my work with Vikrant Vig in which we empirically investigate how organizational hierarchy affects the allocation of credit within a bank. Using an exogenous variation in organizational design, induced by a reorganization plan implemented in 2,000 bank branches, we find that increased hierarchization of a branch decreases its ability to produce "soft" information on loans. Furthermore, this loss of information brings about a reduction in performance of loans. We also document how hierarchical structures perform better in corrupt environments, thus highlighting the benefits of hierarchical decision making in restraining rent extraction. Finally, we document a channel - managerial interference - through which hierarchy affects loan outcomes. In the second chapter, I document how financial institutions alter their firm boundaries to overcome credit market frictions and relax financial constraints. Specifically, I examine the construction of new grain silos by a large agribusiness lender that provides credit to small farmers in Brazil, a market characterized by weak legal institutions. I exploit the staggered nature of the silo construction and employ a difference-in-differences research design to examine how this change in organizational design affects lending. I find that ownership of a silo allows the lender to significantly increase lending to both existing and new borrowers, with the effects being more pronounced for financially constrained borrowers and those exposed to more weather risk. Furthermore, it enables the lender to offer a new contract that provides a price hedge, an innovation that is particularly useful for periods with high commodity price volatility. Most importantly, the effects are stronger in municipalities with weak courts, by so emphasizing the contract enforcement channel. Thus, the paper uncovers an alternative enforcement mechanism, designed by the lender, to overcome weak creditor rights.