Unformatted text preview: on cost analyses.
A managerial implication of our analysis is that sticky costs can be recognized and controlled. Managers can evaluate their exposure to sticky costs
by considering the sensitivity of cost changes to reductions in volume. They
may increase the sensitivity of costs to changes in volume by making contracting decisions that reduce the adjustment costs associated with changing the levels of committed resources. For example, managers may make
it easier to adjust the supply of resources by using temporary employees or
outsourcing functions whose demand for resources varies considerably with
Our study also has implications for ﬁnancial analysts and auditors. A common procedure in ﬁnancial statement analysis involves comparison of SG&A
expense items as a percentage of net sales across ﬁrms within an industry
or over time for a speciﬁc ﬁrm (White, Sondhi, and Fried [1997, p. 148]).
Analysts interpret a disproportionate increase in selling expenses as a negative signal because it may represent a loss of managerial control or an
unusual sales effort (Bernstein and Wild [1998, p. 583], Mintz ). This
analysis may be misleading because the underlying assumption that selling
expenses move proportionately with sales is not empirically valid when the
data include both sales increases and decreases. Similarly, auditors implicitly
assume that costs should move proportionately with sales when performing
analytical review procedures (Messier [2000, p. 545]). Analytical procedures
may be improved by a better understanding of how SG&A costs change with
The empirical models employed in this study provide a platform for further research on the causes and consequences of sticky cost behavior. Although the use of Compustat data enabled documentation of the prevalence
of sticky cost behavior for a large cross-section of ﬁrms, it did not permit ﬁner
disaggregation of the SG&A costs. Future research using ﬁner data may provide information on cost behavior for different components of SG&A costs
as well as other types of costs. Evidence was also provided that sticky cost
behavior is consistent with deliberate decision making by managers who
weigh the economic consequences of their actions. Developing a greater
understanding of the managerial decision-making processes and the forces
that lead to sticky cost behavior will be an important step in improving cost
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