Wouter Dessein (Columbia University); Balint Horvath (University of Arizona); Wolf Wagner (Erasmus University Rotterdam); Wei Zhai (Central University of Finance and Economics)
Abstract
We examine how organizational flexibility influences investment decisions. We develop a novel measure of decentralized decision-making based on observed differences in the pricing of loans across subsidiaries of a banking group. We find that decentralized banks earn economically meaningful higher spreads on loans to borrowers with comparable characteristics. We provide evidence that this can be explained by them better exploiting lending opportunities arising from high, and urgent, demand. They do so by being more flexible in terms of the industries and countries they lend to, and by reacting more quickly to changes in aggregate lending conditions. Overall, the results suggest that a decentralized organization yields material benefits by facilitating more flexible decision-making.