By comparing the variation of sga costs with sales

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Unformatted text preview: st behavior. 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 periods. 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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