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We test for sticky cost behavior by comparing the variation of SG&A costs
with sales revenue in periods when revenue increases with the variation of
SG&A costs with sales revenue in periods when revenue decreases.
H1: The relative magnitude of an increase in SG&A costs for an increase
in sales revenue is greater than the relative magnitude of a decrease
in SG&A costs for a decrease in sales revenue. 2.1 PROPERTIES OF STICKY COSTS Changes in sales revenue may reﬂect short-term market conditions or
long-term shifts in market demand for products and services. Managers
facing a downturn in sales may wait to obtain information that enables them
to assess the permanence of the demand reduction before making decisions
to cut resources. Such delay leads to sticky costs because unutilized resources
are maintained during the interim between the reduction in volume and
the adjustment decision. There may also be a time lag between the decision
to reduce committed resources and the realization of the change in costs
because it takes time to unwind contractual commitments. An implication of
delayed decision-making and contracting lags is that stickiness observed in
one period may be reversed (offset by reductions to committed resources)
in subsequent periods.
H2a: Stickiness of SG&A costs reverses in subsequent periods.
Observation of stickiness in a single period reﬂects the costs of retaining
unutilized resources in a period when a decline in revenue has occurred.
When the observation window is expanded to include multiple periods,
more complete adjustment cycles are captured. Over longer adjustment
intervals, managers’ assessments of the permanence of a change in revenue demand become surer and adjustment costs become smaller relative
to the cost of retaining unutilized resources. Therefore, stickiness of costs
is likely to be less pronounced when observed over greater aggregations of
H2b: Stickiness of SG&A costs declines with the aggregation of periods. 2.2 VARIATION IN THE DEGREE OF STICKINESS Our analysis of sticky costs suggests that managers trade off the anticipated costs of carrying unutilized resources during periods of weak demand
against the expected adjustment costs of retrenching and then ramping up
if demand is restored. The lower the expected adjustment costs relative to STICKY COSTS 51 the costs of carrying unutilized resources, the more managers will reduce
committed resources, resulting in less stickiness. Expected adjustment costs
are determined by managers’ assessments of the uncertainty of upward and
downward movements in demand and their estimates of the costs of removing and then replacing committed resources. Expected adjustment costs
decrease as managers’ assessments of the permanence of revenue declines
get stronger and increase with managers’ estimates of the costs of scaling
back and then scaling up again.
Based on these arguments, we make two sets of hypotheses about how...
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