Unformatted text preview: s is greater in higher growth periods, consistent with the
argument underlying hypothesis 3b that managers would consider revenue
declines that occur in a strong economic climate to be more transitory than
revenue declines in a weak economy.
The signiﬁcant and negative coefﬁcients β 5 = −0.1496 (t -statistic =
−11.38) on the term that includes asset intensity (assets to sales revenue)
and β 6 = −0.0338 (t -statistic = −2.04) on the term that includes employee
intensity (employees to sales revenue) indicate that costs were stickier at
ﬁrms that required relatively more employees or more assets to support
their sales. These results are consistent with the rationale underlying hypotheses 4a and 4b that stickiness increases with the adjustment costs that
would be incurred to reduce committed resources.
We also estimated a random coefﬁcients regression for model (III). Results of estimating this random coefﬁcients model also support hypothesis 3a
that stickiness is less pronounced in a second successive year of revenue deˆ
cline (β 3 = 0.2227, t -statistic = 15.66), hypothesis 3b that stickiness is greater
in years of macroeconomic growth (β 4 = −0.0070, t -statistic = −1.78), hypothesis 4a that stickiness is greater for ﬁrms that use relatively more assets
to support their sales (β 5 = −0.0975, t -statistic = −12.69), and hypothesis
4b that stickiness is greater for ﬁrms that employ relatively more people to
support their sales (β 6 = −0.0143, t -statistic = −1.71). 5. Conclusion
Our evidence documents, in a broad sense, the prevalence of sticky cost
behavior for SG&A costs. In contrast to the commonly received model of
ﬁxed and variable costs, our results are consistent with an alternative model
of cost behavior that recognizes the role of managers in adjusting committed resources in response to changes in activity-based demand for those
resources. The results of this study have important implications for accountants and other professionals who evaluate cost changes in relation
to changes in revenues.
Textbook treatments of cost behavior recommend methods such as regression analysis to estimate the average amount of the change in costs
associated with a unit change in the activity driver (e.g., Hilton [1997,
pp. 312–15], Horngren, Foster, and Datar [1999, pp. 338–39]). Making such
estimations without considering sticky costs leads to underestimation of the
responsiveness of costs to increases in activity and overestimation of the
responsiveness of costs to decreases in activity. Similarly, instructions for
ﬂexible budgeting indicate that budgeted costs should be ﬂexed symmetrically for both positive and negative differences between the actual and 62 M. C. ANDERSON, R. D. BANKER, AND S. N. JANAKIRAMAN initial budget quantity (e.g., Hilton [1997, pp. 526–30], Horngren, Foster,
and Datar [1999, pp. 222–24]). Such methods are likely to cause distortions
in managerial decisions based...
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This document was uploaded on 09/24/2013.
- Fall '13