THE EFFECTS OF MUTUAL TO STOCK CONVERSIONS OF THRIFT INSTITUTIONS ON MANAGERIAL BEHAVIOR

Considerable discussion has surrounded the mutual versus the stock form of organizational structure for savings and loan associations (SLAs). Masulis (1987) found that conversion from a mutual to a stock organization yields abnormal returns for stockholders. The effect of conversion on management behavior, however, was not examined. In this study, the impact on management behavior is tested for conversions during the years 1985 and 1986. Using path analysis, we examine the direct effect of conversion on return on equity as well as the indirect effects due to altered management behavior. While a direct relationship between conversion and return on equity is observed, the results also suggest that conversion itself does not equally affect the expense preference behavior and risk-taking propensity of management. To examine the issue of managerial behavior effectively, we test the relationship between the new stock issued to the management of the converting SLA and managerial behavior. Above the levels of ownership identified by a switching regression model, expense preference behavior increases and risk-taking propensity decreases. The results suggest that the benefits of conversion and increased ownership control on managerial behavior have been at least partially offset by the exercising of subscription rights by existing management. © 1990 Kluwer Academic Publishers.