EXPENSE PREFERENCE AND MINORITY BANKING: A NOTE

Previous research has concluded that, in comparison to nonminority institutions, minority-owned banks have lower profitability and higher operating costs. This note examines such findings in the context of the expense preference theory of managerial behavior. Rather than focusing on the effect of regulated product markets, however, this research investigated whether imperfections in the capital markets, introduced through government deposit programs making low-cost funds available to participating minority banks, were associated with expense preference practices by minority bank managers. The results suggest that managers of minority banks did not practice the traditional forms of expense preference but instead appeared to act in a manner consistent with public policy objectives.