Ownership effects on operating strategies: Evidence of expense‐preference behavior in the hospital industry

Abstract

Expense preference offers an alternative to profit‐maximization theory in explaining firms' operating strategies (Williamson, 1963; Rees, 1974). Expense‐preference theory suggests that when disctretionary behavior is allowed, corporate managers may choose to maximize individual utility instead of corporate profit. Expense‐preference behavior tends to be evidenced by higher expenditures on items for which managers have a positive personal preference than would be justified by profit maximization. Conditions under which significant managerial discretion can emerge include weak competition, strictly controlled entry, a high degree of regulation, separation of ownership and control, and existence of a strong public interest character for the firm or industry (Awh and Primeaux, 1985; Edwards, 1977). The hospital industry may be characterized as operating under all the above conditions. Hospital ownership can be classified as being either not‐for‐profit or proprietary. Profit‐maximization influences are generally not present in not‐for‐profit hospitals, thus further increasing managerial discretion with respect to operating expenses. This study provides support for the contention that expense‐preference behavior exists in not‐for‐profit hospitals as compared to proprietary hospitals. Specifically, we present evidence of considerable managerial discretion in the allocation of resources in not‐for‐profit hospitals.

Expense Preference Behavior by Managers in Casino Resorts

“…There is strong support from previous research that being highly regulated can give managers more opportunity to exhibit expense preference behavior (Gropper & Hudson, 2003;Gropper & Oswald, 1996;Mixon & Upadhyaya, 1996;Williamson, 1963). The fact that over three-fourths of the casinos are publicly owned shows that these firms have a high possibility of a greater separation of ownership, which is also supported by previous research to give managers a chance to exhibit expense preference behavior (Akella & Greenbaum, 1988;Oswald et al, 1994;Verbrugge & Goldstein, 1981;Verbrugge & Jahera, 1981).…”

“…Researchers believe that not-for-profit managers will spend more because not-for-profit firms cannot make money for their owners, although the results are mixed. Oswald, Gardiner, and Jahera (1994) and Carter et al (1997) show that managers under a not-forprofit structure spend more than those under a proprietary structure, while Lewin et al (1981) find different results depending on what expenses they evaluate. Becker and Sloan (1985) believe it is important to control for other firm differences besides just ownership structure.…”

Management Discretion and Political Interference in Municipal Enterprises. Evidence from Italian Utilities

“…The agency theory also sheds light on the traditional 'expensepreference' theory (e.g. Oswald et al 1994). 9.…”

The Power of Networks: Integration and Financial Cooperative Performance

“…Leggett and Strand (2002) found that the wave of mergers and rapid growth in size of United States credit unions that followed the 1982 elimination of multiple bond restriction, is resulting in measurable increase in 'agency costs' -a parallel concept proposed by Jensen and Meckling (1976). The effect was also found in the United States Savings and Loans sector (Mester 1989, 1991, Verbrugge and Goldstein 1981, Verbrugge and Jahera 1981, in other industries (Oswald and Gardiner 1994, Awh and Primeaux 1985, Rhoades 1980 and in mutual property liability insurance firms (Cummins, Weiss and Zi 1999).…”