Do Relationships Matter? Evidence from Loan Officer Turnover

We study the effect of employee turnover on measures of firm performance and client retention in a firm where employees have decentralized knowledge and personal relationships with their clients. Using exogenous shocks to the relationship between borrowers and loan-officers, we document that borrowers are less likely to receive new loans from the bank and are more likely to apply for credit from other banks when their original loan officers are absent. They are also more likely to miss payments or go into default. These costs are mitigated when the bank is able to facilitate knowledge transmission from the departing loan officers to a successor. However the sharing of knowledge does not happen when turnovers are unexpected as in the case of sick leaves, or when loan officers do not have incentives to transfer information, as in the case of dismissals. ∗Alejandro Drexler is at the McCombs School of Business at The University of Texas at Austin, Antoinette Schoar is at the Sloan School of Management at MIT, NBER, and ideas42. We are grateful for the comments and suggestions of Daniel Paravisini, Amiyatosh Purnanandam, Borja Larrain, Giorgo Sertsios, the participant in Texas Finance Festival, and the seminars at The University of Texas at Austin, University of Houston, and Universidad Católica de Chile. We thank BancoEstado, especially Roxana Aravena, Jose Luis Arriagada, Pablo Coto, Enrique Errazuriz, Carlos Hernandez, Soledad Ovando, Hector Pacheco, Oliver Prostran, Marco Sambuceti, German Texido, Emilio Velez, Victor Vera, and Pamela Zalduando for providing the data and making us familiar with the internal HR processes of the bank. We also thank Manasee Desai, and Katherine Gordon for their help collecting and organizing the data. Finally we thank Safia Albaiti, Niloufar Rohani, and Rouzhna Nayeri for excellent work in editing the paper. All remaining errors are our own.