Lender financial reporting incentives and loan prioritization during the Paycheck Protection Program

Abstract

Purpose

This study contributes to a growing body of literature on the Paycheck Protection Program (PPP) by examining how lender incentives affected prioritization of large borrowers. In addition, this study separately examines incentives for commercial banks and credit unions during the program.

Design/methodology/approach

Using 2020 PPP loan data, the authors create a proxy for lender loan prioritization by comparing the skewness statistics of large and small loan distributions. A regression model is used to examine lender reporting incentives and loan prioritization.

Findings

Results show that larger borrowers were prioritized in receiving PPP loans earlier. Lenders with financial reporting concerns and commercial banks favored large borrowers to a greater extent.

Practical implications

This study may inform social planners and regulators about the benefits and costs of delegating emergency funding loan decisions to financial institutions.

Originality/value

The authors believe this paper is the first to examine financial institution reporting incentives in relationship to PPP lending practices. It adds novelty by examining lender incentives, while prior research has focused heavily on the economic consequences of the program and how borrower–lender relationships affected loan practices during the program.

Citation

Bailey, C. and Sokolowski, M. (2022), "Lender financial reporting incentives and loan prioritization during the Paycheck Protection Program", Managerial Finance, Vol. 48 No. 12, pp. 1707-1725. https://doi.org/10.1108/MF-11-2021-0530