Economic climate to be more transitory than revenue

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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. ˆ The significant and negative coefficients β 5 = −0.1496 (t -statistic = −11.38) on the term that includes asset intensity (assets to sales revenue) ˆ 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 ˆ 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 ˆ 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 ˆ 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.

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