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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.

Suggested Citation

  • Timothy H. Hannan & Ferdinand Mavinga, 1980. "Expense Preference and Managerial Control: the Case of the Banking Firm," Bell Journal of Economics, The RAND Corporation, vol. 11(2), pages 671-682, Autumn.
  • Handle: RePEc:rje:bellje:v:11:y:1980:i:autumn:p:671-682
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    Cited by:

    1. Ely, David P. & Song, Moon H., 2000. "Acquisition activity of large depository institutions in the 1990s:: An empirical analysis of motives," The Quarterly Review of Economics and Finance, Elsevier, vol. 40(4), pages 467-484.
    2. 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, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    3. Dirk Höring & Helmut Gründl & Sebastian Schlütter, 2016. "Impediments to Communication in Financial Institutions: Implications for the Risk Management Organization," The Geneva Papers on Risk and Insurance Theory, Springer;International Association for the Study of Insurance Economics (The Geneva Association), vol. 41(2), pages 193-224, September.
    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. Tasso Brandt & Torben Schubert, 2014. "Is the university model an organizational necessity? Scale and agglomeration effects in science," Chapters,in: Knowledge, Diversity and Performance in European Higher Education, chapter 8, pages iii-iii Edward Elgar Publishing.
    6. Marianne Bertrand & Sendhil Mullainathan, 1999. "Is There a Discretion in Wage Setting? A Test Using Takeover Legislation," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 535-554, Autumn.
    7. Gabriel Jiménez & Jesús Saurina, 2006. "Credit Cycles, Credit Risk, and Prudential Regulation," International Journal of Central Banking, International Journal of Central Banking, vol. 2(2), May.
    8. Lamberte, Mario B. & Manlagnit, Ma. Chelo V., 2004. "Evaluating the Impacts of Competition Policy Reforms on the Efficiency of Philippine Commercial Banks," Discussion Papers DP 2004-46, Philippine Institute for Development Studies.
    9. Robert DeYoung, 1998. "Management Quality and X-Inefficiency in National Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 13(1), pages 5-22, February.
    10. Berger, Allen N. & Bonaccorsi di Patti, Emilia, 2006. "Capital structure and firm performance: A new approach to testing agency theory and an application to the banking industry," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1065-1102, April.
    11. repec:spr:scient:v:94:y:2013:i:2:d:10.1007_s11192-012-0834-2 is not listed on IDEAS
    12. Glenn Withers, 1981. "Efficiency Gains from Banking De-Regulation," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 14(1), pages 35-39.
    13. Tudor, Kerry William, 1985. "The impact of management ability and market structure on the performance of agricultural banks in Iowa," ISU General Staff Papers 198501010800009749, Iowa State University, Department of Economics.
    14. Deshmukh, Sudhakar D. & Greenbaum, Stuart I. & Thakor, Anjan V., 1982. "Capital Accumulation and Deposit Pricing in Mutual Financial Institutions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(05), pages 705-725, December.
    15. Akhigbe, Aigbe & McNulty, James E., 2003. "The profit efficiency of small US commercial banks," Journal of Banking & Finance, Elsevier, vol. 27(2), pages 307-325, February.
    16. Mark Roe, 2002. "Les rentes et leurs conséquences en matière de gouvernance des entreprises," Revue Finance Contrôle Stratégie, revues.org, vol. 5(1), pages 167-215, March.
    17. Sirajo Aliyu & Rosylin Mohd Yusof, 2016. "Profitability and Cost Efficiency of Islamic Banks: A Panel Analysis of Some Selected Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 6(4), pages 1736-1743.
    18. 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.
    19. Roy Mersland & Daudi Pascal & Leif Atle Beisland, 2016. "The influence of CEO power on agency costs in non-profit organisations: evidence from the global microfinance industry," Working Papers CEB 16-045, ULB -- Universite Libre de Bruxelles.
    20. Gropper, Daniel M. & Hudson, Carl D., 2003. "A note on savings and loan ownership structure and expense preference: A re-examination," Journal of Banking & Finance, Elsevier, vol. 27(10), pages 2003-2014, October.
    21. 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.
    22. DeYoung, Robert & Spong, Kenneth & Sullivan, Richard J., 2001. "Who's minding the store? Motivating and monitoring hired managers at small, closely held commercial banks," Journal of Banking & Finance, Elsevier, vol. 25(7), pages 1209-1243, July.

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