The role of human capital in loan officers' decision policies.

Little research exists that explicitly addresses how differences in human capital influence the degree to which various decision cues are used, and the empirical findings that have been presented are inconclusive (e.g., Camerer & Johnson, 1991). Individuals that have a high level of expertise in their job, or specific human capital, are likely to view problems and solutions in a different way than those with less expertise (Gavetti & Levinthal, 2000). Camerer and Johnson (1991) showed that experts have greater ability to use contingent decision rules. That is, interactions of different decision cues are more common among decision makers with greater human capital. Experts are typically efficient in their decision making by focusing on those attributes that contribute most to the outcomes of decisions (Chase & Simon, 1973; Choo & Trotman, 1991). A greater level of knowledge can help decision makers more efficiently process and make sense of larger quantifies of information and consequently reach decisions quicker (Forbes, 2005; Logan, 1990; Wozniak, 1987). Although this speed is often attributed to mental shortcuts involved with the use of heuristics (Libby & Lewis, 1982; Ucbasaran, Wright, Westhead, & Busenitz, 2003), this does not necessarily mean that experts' decision policies are simple. There is evidence that expert decision makers have policies based on a deep structure with more, stronger, and richer links between attributes (Gobbo & Chi, 1986). This increased richness is reflected, in part, by the use of contingent relationships between attributes. For example, Kuusela, Spence, and Kanto (1998) found that mortgage loan experts used more compensatory decision rules in making mortgage loan decisions.

Loan officers are attempting to determine the likelihood of loan repayment. Based on explicit decision policies set forth by the bank, loan officers would likely sum up the pros (e.g., independent collateral), and subtract the cons (e.g., high-risk project) to determine an aggregate "score" in order to rate the risk for any given customer. Loan officers with greater human capital will be more likely to use a multiplicative approach with risk factors by using contingencies in the decision process. They will have the knowledge, experience, and skill required to consider the level of business risk in the context of other variables such as competence, financial position, or collateral, and weigh the factors collectively and interactively.

In an attempt to capture the gradations of human capital along the continuum from general to specific, we operationalize human capital in four different ways. Starting with more general human capital and moving toward more specific human capital, we consider education, banking experience, lending experience, and the level of recent exposure to small-business loans. Each of these types of experience will produce a combination of general and specific human capital. However, education is more focused on broad-based skills that can be applied to a variety of responsibilities and is commonly used as a proxy for general human capital (Gimeno et al., 1997). General banking experience would also increase general human capital, but would also provide an opportunity to develop more specific knowledge and skills peculiar to the banking industry than education. The next level of specificity can be approximated by expertise which is cultivated through years of hands-on experience with the lending process. Finally, greater concentrated recent exposure to the particular task of approving small-business loans would lead to a more intense schooling of the nuances and tacit knowledge related specifically to small business loans and thus represents an even higher level of specific human capital. With these operationalizations in mind for the continuum of general to specific human capital, we submit:

Hypothesis 1: The loan granting decision process of loan officers with more human capital in terms of (a) education, (b) banking experience, (c) lending experience, and (d) recent small-business loan experience will be more complex, through the use of contingent relationships that mitigate business risk, than that of loan officers with less human capital.

The Effect of Human Capital on the Probability of Loan Approval

The development of specific human capital, and to some extent general human capital, is accelerated by intense on-the-job training (Becker, 1964). For loan officers, increased exposure to the small-business loan process will result in increased human capital that is unique to approving loans for small businesses. The tacit knowledge gained through such experience will enable the loan officer to make decisions quicker (Forbes, 2005), consider a larger number of potentially satisfactory alternatives (Wozniak, 1987), and know how to work within the firm-specific system to achieve a desired result (Hatch & Dyer, 2004).

Another inherent consequence of frequent and concentrated experience is greater familiarity with small businesses and small business loans. Frequent exposure builds familiarity which tends to lower the perception of risk (Lipshitz & Strauss, 1997; Sitkin & Pablo, 1992). Given that most people are risk averse in a gain situation (Kahneman & Tversky, 1979), we would expect individuals to more highly value familiar candidates or situations than unfamiliar candidates or situations. We deduce that those with greater familiarity will have less variance around the expected performance of a candidate than someone who has less experience with this (or this type of) candidate. In other words, loan officers who are more familiar with small-business loans perceive relatively less risk in small-business loans and are more likely to approve the loan than loan officers with less experience.

More experienced individuals also typically have greater self-efficacy in the relevant task. Self-efficacy is defined as the belief in one' s capabilities to organize and execute the sources of action required to manage prospective situations (Bandura, 1995). Self-efficacy beliefs influence the choices one makes, the effort exerted, and the perseverance exhibited when confronted with adversity (Bandura, 1995; Druckman, 2004). Self-efficacy is most effectively developed through mastery experience (Bandura, 1986; Wood & Bandura, 1989). When an individual experiences a personal success with the pertinent behavior, the belief in the ability to manage a similar future situation is enhanced. A loan officer with greater relative experience with lending to small businesses will likely have greater self-efficacy in finalizing small business loans than those loan officers with less mastery experience. The higher level of self-efficacy will lead to increased effort, sustained perseverance, and less perceived risk in the small-business lending process.

The greater tacit knowledge, familiarity, and self-efficacy associated with higher levels of specific human capital affect the decision-making process by lowering perceptions of risk, enhancing the awareness of a greater number of viable solutions, and by increasing the perseverance toward successful loan completion. These factors increase the likelihood of a positive outcome for the applicant, namely, loan approval. Thus,

Hypothesis 2: Loan officers with higher levels of specific human capital will be more likely to approve small business loans than loan officers with less specific human capital.

In the preceding sections, we proposed that human capital affects decision-policy contingencies and decision outcomes such that those with more human capital differ from those with less human capital. These hypotheses suggest that human capital will have a similar effect on the decision policies of loan officers, regardless of the characteristics of the borrower. In the following section we explore an alternative source of human capital influence on decision policies. We use the similarity-attraction paradigm to submit individual differences in loan officers' decision processes based upon the extent to which the borrowers' human capital is similar to the human capital of the loan officer.

Borrower Similarity and Loan Officers' Decision Policies

In academia, as well as in practice, it is generally believed that knowledge, skills, and experience are predictive attributes for entrepreneurial success. Human capital has been shown to have a positive impact on entry into nascent entrepreneurship (Davidsson & Honig, 2003), venture survival and growth (Cooper, Gimeno-Gascon, & Woo, 1994), and employment growth (Ranch, Frese, & Utsch, 2005). An entrepreneur's prior experience in a similar business or a previous start-up often spawns a social network of customers, suppliers, or support personnel that can have a minimizing effect on the liabilities of the newness of the firm (Aldrich & Auster, 1986) Chandler and Hanks (1998) suggested that human capital can be as beneficial to emerging business ventures as financial capital. Baum and Silverman (2004) have shown that venture capitalists place significant emphasis on the level of an entrepreneur's human capital when making investment decisions. It follows that banks would consider the small-business owner's human capital as an important factor in determining credit-worthiness for a small-business loan.

While all loan officers are likely to look favorably on a small-business owner's human capital, we use the similarity-attractiveness paradigm to propose that the level of emphasis placed on the entrepreneur's human capital will vary according to the loan officer's level of human capital.