How gender and emotions bias the credit decision-making in banking firms

Abstract

This study sheds the light on the effect of the emotional bias and the gender on the credit risk management of Tunisian banks. We may expect that male and female CEO react differently to emotions and that gender-based behavior differences will affect the organizational design of the credit decision making. We opt for a Bayesian Net Work method which uses the variables to express the events or objects and analyze their behaviors to model such causal relationships. Results show that emotional bias can explain the cross-sectional heterogeneity in risk-taking behavior among banks and that managers’ gender types influences the propensity to delegate the credit decision making. Overconfident and optimist female banks’ manager are more conservative than males and they tend to centralize the credit decision-making process. Findings show also that financial literacy significatively affect the credit decision making, whereas bank size have no effect.

Introduction

Survey evidence in Ben-David et al. (2007) indicates that a manager’s ability to assess and cope with risk has pervasive effects on corporate decision-making. Consistent with this notion, recent finance and accounting studies document that CEO fixed effects explain a large portion of the observed variation in corporate policies and outcomes, which traditional firm-level determinants cannot explain. The literature dealing with the managerial characteristics’ impact on corporate policies emphasize the importance of individual’s bias on the effectiveness scope of decision-making choices (Baker et al., 2004, Hackbarth, 2009, Malmendier et al., 2010, etc.). These authors argued that managers are a fundamental part of firms as they are typically involved in the strategic decision-making, are being responsible of firm’s strategy, coordination activities, and allocation of resources. Thus, managers and their characteristics influence the strategic and organizational outcomes. Their characteristics affect how they interpret the situations they face and the decisions they make, having thus an impact on organizational performance (Degeorge and Fayolle, 2009).

The literature on organizational architecture suggest that the decision effectiveness has its explanation in the individual’s behavior as well as his capacity to produce, process and exchange information and knowledge, necessary for efficient decision making to take place. Organizational architecture theory highlights that performance is defined by co-locating decision-making rights and specific knowledge at a lower cost (Brickley et al., 2009). The allocation of decision authority or delegation constitute thus a key dimension in explaining the level of organizational performance (Aghion and Tirole, 1997).

Moreover, Mukhtar (2002), Eagly (2005) and recently Brescoll (2016) have proven that gender is relevant in many aspects of firms’ organizational design. Besides environment faced by the firms, trustworthy, competence and skills of the individuals involved, the allocation of decision authority may be driven by stereotypes. In fact, there is a general convincement that women are less competent and knowledgeable than men, they tend to make decisions without consulting other managers (Mukhtar, 2002), are unpredictable and encounter difficulties in enforcing their orders, due, for instance, to their linguistic style (Brescoll, 2016).

Others empirical studies have reported that women are more sensitive to emotions (Eagly and Wood, 1999, Eagly, 1995, Feingold, 1994, Eakle, 1995). Eagly (1995) explains that most gender differences result from the adoption of gender roles, which define appropriate conduct for men and women. Gender roles are shared expectations of men’s and women’s attributes and social behavior, and are internalized early in development. He argued that gender roles reflect preexisting and natural differences between the sexes in abilities and predispositions. A rather different example of a social psychological approach is the artifact model (Feingold, 1994) that explains gender differences on personality scales in terms of method variance. Social desirability bias may lead men and women to endorse gender-relevant traits, and some traits may be less undesirable for women than for men.

In the extent of works dealing with behavioral corporate finance, this paper try to study the behavioral biases’ various effects on the credit decision making process, with a particular interest being placed in the organizational architecture of the risk assessment likely to be opted for. We aim to investigate the possible influence of three emotional biases, namely, loss aversion, optimism and overconfidence on the organizational architecture of credit decision-making. Therefore, we try to disentangle whether the gender of the individual influence the extent to which they are entitled with decision authority. Besides, we try to verify whether manager’s generic managerial knowledge, represented by the possession of a heigh degree, and decision-specific knowledge, as reflected by the work experience, alleviate the negative effect of the gender stereotypes.

The present study is conceived to provide a pioneering empirical test of this advanced hypothesis, while simultaneously presenting new data involving the different factors helping to explain the bank’s opted choices in terms of credit decision-making, through a sample including a number of Tunisian banks.