Managerial Discretion and Expense Preference Behavior

Abstract

Considerable debate has raged over the economic assumption that the large corporation, through the decisions of its managers, attempts to maximize its profits. Closely related to the notion of profit maximization is expense behavior of managers which would indicate a preference for expenses over firm profit. This study examines the market structure effects on expense behavior and, for the first time, tests are made using data which unambiguously reflect market structure differences between firms in the sample. The results provide evidence that is contrary to the expense hypothesis. 1E~ CONOMISTS have long been interested in managerial motivation. As Ciscel and Carroll ((1980); Carroll and Ciscel (1982)) recently explain, considerable debate has raged over the economic assumption that the large corporation, through the decisions of its managers, attempts to maximize its profits. Closely related to the notion of profit maximization is expense behavior of managers which would indicate a preference for expenses over firm profits. The tension between profit maximization behavior and expense behavior of managers has been discussed by Larner (1970). One condition which could affect a firm's ability and willingness to engage in expense behavior is the market structure in which it operates. This study examines the market structure effects on expense behavior and, for the first time, tests are made using data which unambiguously reflect market structure differences. The results provide evidence contrary to the expense hypothesis and the findings are quite consistent with the previous research of Ciscel and Carroll (1980), Larner (1970), Rhoades (1980), and Glassman and Rhoades (1980).