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Unformatted text preview: the degree of stickiness of SG&A costs varies across ﬁrms and over time.
First, we consider how the degree of stickiness would vary across situations
that produce different expectations about the permanence of a decline in
revenue activity (hypotheses 3a and 3b). Then, we consider how the degree
of stickiness would vary with factors that indicate circumstances where the
adjustment costs are likely to be higher (hypotheses 4a and 4b).
Because demand ﬂuctuates with product market and economywide conditions, information about upward or downward trends in speciﬁc or general factors affecting demand accumulates as the trends develop. Managers’
assessments of the permanence of a demand reduction are likely to get
stronger as a revenue decline continues. Therefore, managers are likely to
consider a revenue decline to be more permanent when it occurs in a second
consecutive period of revenue losses. Increased likelihood of a permanent
decline may motivate managers to scale down resources, resulting in less
stickiness. Accordingly, we hypothesize that less stickiness occurs in periods
when revenue also declined in the preceding period.
H3a: Stickiness of SG&A costs is less pronounced when revenue also
declined in the preceding period.
Managers evaluating the permanence of declines in demand in their speciﬁc product markets look to broader measures of economic activity for information that is useful in assessing the factors contributing to the decline.
A decline in demand is more likely to persist in periods of economic contraction than in periods of economic growth. Therefore, managers would be less
willing to reduce committed resources in periods of macroeconomic growth
than in other periods, resulting in more stickiness. Also, shortages of labor
in periods of economic growth increase the cost of replacing retrenched
employees, reinforcing this stickiness.
H3b: SG&A costs exhibit greater stickiness during periods of macroeconomic growth.
Adjustment costs are likely to be higher when SG&A activities rely more
on assets owned and people employed by a company than materials and
services purchased by the company. Unless long-term contracts exist, it is
relatively easy to scale down purchased resources when demand drops, but
disposing of assets is costly because the company must pay selling costs
and lose ﬁrm-speciﬁc investments (installation and customization costs). M. C. ANDERSON, R. D. BANKER, AND S. N. JANAKIRAMAN 52 Restructuring charges recognized when a ﬁrm downsizes typically involve
large write-downs of ﬁxed assets (Stickney and Brown [1999, pp. 219–22]).
H4a: The degree of stickiness increases with the asset intensity (ratio of
total assets to sales revenue) of the company.
Similarly, the costs of adjusting committed resources are likely to be higher
for ﬁrms that use more employees to support a given volume of sales. Dismissing employees is costly because employers must pay severance costs. Restructuring charg...
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This document was uploaded on 09/24/2013.
- Fall '13