How organizational hierarchy affects information production

Skrastins, J and Vig, V (2019) How organizational hierarchy affects information production. Review of Financial Studies, 32 (2). pp. 564-604. ISSN 0893-9454

Abstract

We exploit a variation in organizational hierarchy induced by a reorganization plan implemented in roughly 2,000 bank branches in India. We do so to investigate how organizational hierarchy affects the allocation of credit. We find that increased hierarchization of a branch induces credit rationing, reduces loan performance, and generates standardization in loan contracts. Additionally, we find that hierarchical structures perform better in environments characterized by a high degree of corruption, highlighting the benefits of hierarchies in restraining rent-seeking activities. Overall, our results are consistent with the view that valuable information may be lost in hierarchical structures.