Testing for Expense Preference Behavior: Mutual versus Stock Savings and Loans

Abstract

This article investigates expense preference behavior in the savings and loan industry. Previous studies used an intercept test and, in general, concluded that managers of mutual S&Ls exhibit expense preference behavior. I derive the necessary and sufficient conditions on cost functions for the intercept test to be valid. These restrictions are rejected for the savings and loan industry. Stock and mutual S&Ls have different cost structures, and both have non-Cobb-Douglas production technologies. I derive a new, more general test for expense preference behavior that does not require the restrictive assumptions of the intercept test. The results of this test do not support earlier conclusions of managerial expense preferences.