And over time first we consider how the degree of

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

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...
View Full Document

This document was uploaded on 09/24/2013.

Ask a homework question - tutors are online