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Expense Preference and Managerial Control: the Case of the Banking Firm

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  • Timothy H. Hannan
  • Ferdinand Mavinga

Abstract

This article presents a test of the expense-preference theory of the firm as it applies to the banking industry. We use a model which incorporates explicitly the role of control by the firm's owners in determining the level of firm's inputs chosen by managers and yields implications which allow ownership information to be used in a more extensive test of the expense-preference hypothesis than heretofore has been conducted. We test the model by using detailed information on the dispersion of ownership and on other characteristics of a large number of individual banking firms. Consistent with the implications of expense-preference behavior, manager-controlled banks operating in noncompetitive markets are found to spend more on items likely to be preferred by managers than do owner-controlled banks in the same situation. This, along with other results, lends support to the expense-preference model over the more traditional one of profit maximization.

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Bibliographic Info

Article provided by The RAND Corporation in its journal Bell Journal of Economics.

Volume (Year): 11 (1980)
Issue (Month): 2 (Autumn)
Pages: 671-682

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Handle: RePEc:rje:bellje:v:11:y:1980:i:autumn:p:671-682

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Cited by:
  1. Robert DeYoung, 1998. "Management Quality and X-Inefficiency in National Banks," Journal of Financial Services Research, Springer, vol. 13(1), pages 5-22, February.
  2. repec:fth:prinin:406 is not listed on IDEAS
  3. Bertrand, M. & Mullainathan, S., 1998. "Is there Discretion in Wage Setting? A Test Using Takeover Legislation," Papers 203, Princeton, Woodrow Wilson School - Public and International Affairs.
  4. Stephen D. Prowse, 1995. "Alternative methods of corporate control in commercial banks," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q III, pages 24-36.
  5. Marianne Bertrand & Sendhil Mullainathan, 2003. "Enjoying the Quiet Life? Corporate Governance and Managerial Preferences," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 1043-1075, October.
  6. Höring, Dirk & Gründl, Helmut, 2011. "Risk management's place in an organisation: A tradeoff between independence and co-ordination," ICIR Working Paper Series 05/11, International Center for Insurance Regulation (ICIR), Goethe University Frankfurt.
  7. Gaston, Noel, 1997. "Efficiency wages, managerial discretion, and the fear of bankruptcy," Journal of Economic Behavior & Organization, Elsevier, vol. 33(1), pages 41-59, May.

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