Regulation, deregulation and managerial behaviour: new evidence on expense preference in banking

Expense preference theory suggests that when discretionary behaviour is an option, firm managers may choose to maximize individual utility rather than firm profits. Expense preference behaviour is generally exhibited by a positive preference for increased expenditures on staff size, salaries and benefits, and other perquisites. A large amount of research has examined expense preference behaviour in the financial services industry, with mixed results. This paper builds on previous studies to develop and test an empirical model of expense preference behaviour before and after deregulation in the banking industry. The results suggest a decrease in expense preference behaviour in the latter time period.