Management Ownership and Firm Compensation Policy: Evidence from Converting Savings and Loan Associations
Carter, Richard B., Stover, Roger D., Financial Management
The distinction between mutual and stock savings and loan associations has permitted consideration of various facets of the owner-manager conflict. One such facet, expense preference, refers to the tendency of managers to spend more on prequisities than profit-maximizing would dictate. Both theoretical (Deshmukh, Greenbaum, and Thakor , Fama and Jensen , and Rasmussen ) and empirical (Verbrugge and Jahera , and Akella and Greenbaum ) research suggest the existence of expense preference behavior among mutual savings and loan association (SLA) management when compared with that of stock firms. However, Morck, Shleifer, and Vishny  find that the managers of nonfinancial stock firms are not necessarily value-maximizing within a certain range of managerial ownership of the firm. Therefore, the presumed lack of expense preference behavior among stock SLAs may be incorrect for all levels of management ownership.
This study examines a select sample of stock savings and loan associations that have recently converted from mutual ownership as a test of a relatively uncontaminated change in ownership structure on managerial behavior. Such behavior is quantified in terms of employee compensation because of the broad use of that measure in previous studies of financial institutions. (1) The exclusive examination of the compensation of SLAs avoids any interindustry influences. Both Krueger and Summers  and Kole  have raised questions regarding interindustry effects on traditional measures of managerial behavior, particularly the findings of Morck, Shleifer, and Vishny . To assess differential changes in expense preference behavior for the stock SLAs, employee compensation and certain control variables are examined relative to a matched sample of SLAs remaining mutual in the same market. Further, external factors potentially affecting the level of expense preference such as market concentration (Edwards , Hannan and Mavinga , James , and Verbrugge and Jahera ), board of directors' composition (Brickley and James , and Morck, Shleifer, and Vishny ), and the market for corporate control (James ) are explicitly considered.
Our results relating employee compensation, as an example of expense preference behavior, and management ownership are consistent with the Morck, Shleifer and Vishny  conclusions concerning overall firm value. We employ a switching regression model which avoids the arbitrary switching points of Morck, et al. Our findings suggest a negative relationship between compensation and management ownership at both low and high levels of ownership with a positive relationship occurring in the middle range. None of the external factors examined altered these conclusions. The conclusions also provide potentially useful information for the regulation of the conversion process. In particular, the results suggest that it may be advantageous to control management's purchase of a converting firm's common stock to avoid the tendency toward expense preference behavior.
The paper progresses as follows. Section I provides a background of the previous research in expense preference behavior and management ownership, with particular reference to stock versus mutual SLAs. The sample and empirical methodology are presented in Section II. Section III contains the results, and Section IV the summary and conclusions.
I. Organizational Form, Expense
Preference Behavior and Ownership
Previous research relating to the mutual form of organization has documented the existence of expense preference behavior on the part of management. (2) In their review of earlier studies of mutual SLAs, Verbrugge and Jahera  found that these organizations tended to exhibit higher operating expenses, higher personnel expenditures, lower profitability, and less risky portfolios than comparable stock institutions. Further, they found the expense preference tendency in their study of California SLAs and, separately, in the SLAs in other states. …