Escalation at the credit window: A longitudinal study of bank executives' recognition and write-off of problem loans.

Abstract

Although the escalation literature has grown steadily over the past 20 years, there has been very little research bridging the gap between laboratory experiments and qualitative field studies on escalation. What has been missing are quantitative tests of escalation hypotheses in their natural context. This study helps fill such a gap by testing the responsibility hypothesis within the banking industry. It was predicted that the turnover of senior bank managers would lead to a deescalation of commitment to problem loans. Data collected from 132 California banks over a 9-year period showed that bank executive turnover predicted both provisions for loan losses and the write-off of bad loans. In contrast, provisions and write-offs were not found to influence executive turnover. The implications of these results are discussed in terms of both the escalation literature and practical ways to improve decision making in the banking industry.