Financial Distress - A Comparative-Study Of Individual, Model, And Committee Assessments

Recent behavioral decision research studies in accounting have focused on predictions of loan default by individual subjects (Abdel-khalik and El-Sheshai [1980] and Zimmer [1980]). However, such decisions in practice are generally under the purview of loan review committees who, in addition to a simple binary decision, also assess both the likelihood of default relative to outstanding loans and the monetary consequences of subsequent loan review action-outcomes. Relatively little evidence exists to date in accounting settings concerning how multiperson decisions compare to individual decisions (some exceptions are Schultz and Reckers [1981], Solomon [1982], and Uecker [1982]), and no study I am aware of has specifically examined group judgments within a loan review setting. The objective of this study was to compare loan default predictions of individual loan officers, loan review committees, and a statistical model. Subjects' tasks required that they provide subjective judgments of financial distress, posterior probabilities of loan default given population base rates, and finally loan review actions conditional upon expected monetary outcomes for a sample of actual distressed and nondistressed firms. Individual and committee decisions were compared and contrasted to predictive models generated by discriminant and Bayesian analysis, based on the same data. Experimental results indicated significant differences between the model and individual officer and review committee decisions along several task dimensions. Generally, group performance was supe-