Managerial objectives in Japanese banking: a test of the expense preference hypothesis

Starting from the argument that profits are not paramount for Japanese banks, their managerial objectives are investigated by testing the expense preference hypothesis (EPH). The validity is questioned for previous studies which tested EPH as a joint hypothesis with the market structure performance hypothesis and/or the hypothesis that organizational structures have an effect on the presence of an expense preference because of their assumption of the linear utility function. The method adopted in most of these studies is shown to be invalid when the utility functions are not linear. A valid method is proposed which can test EPH as a single hypothesis. Empirical results show (1) the restriction of the linearity on the utility function is rejected, implying that the previous method is invalid and (2) neither profit maximization nor expense preference behaviour is found in Japanese banking.