Lose investments made in rm specic training if

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Unformatted text preview: es usually include large amounts for severance payments. Employers also lose investments made in firm-specific training if employees are released when demand falls and new employees must be hired when demand picks up again. In addition, companies experience productivity losses because morale declines when employees are laid off, and they may experience more turnover because employee loyalty is eroded. H4b: The degree of stickiness increases with the employee intensity (ratio of number of employees to sales revenue) of the company. 3. Empirical Tests of Stickiness of SG&A Costs An empirical model that enables measurement of the SG&A response to contemporaneous changes in sales revenue and discriminates between periods when revenue increases and revenue decreases is presented. The interaction variable, Decrease Dummy, takes the value of 1 when sales revenue decreases between periods t − 1 and t , and 0 otherwise. Model (I): log SG&Ai,t SG&Ai,t −1 = β0 + β1 log Revenuei,t Revenuei,t −1 + β2 ∗ Decrease Dummyi,t ∗ log Revenuei,t + εi,t . Revenuei,t −1 This model provides the basis for our test of stickiness of SG&A costs.3 Because the estimation is cross-sectional with a wide variety of industries and large differences in the size of firms, the ratio form and log specification improves the comparability of the variables across firms and alleviates potential heteroskedasticity. Empirically, the Davidson and MacKinnon [1981] test rejects the linear form in favor of this loglinear model. Results are qualitatively similar to those presented for all our models when we estimate them with linear specifications. The log specification also accommodates economic interpretation of the estimated coefficients. Because the value of Decrease Dummy is 0 when revenue increases, the coefficient β1 measures the percentage increase in SG&A costs with a 1% increase in sales revenue. Because the value of 3 If the traditional fixed- and variable-cost model is valid, upward and downward changes in costs will be equal and consequently β2 = 0. Furthermore, if fixed costs are present, β1 < 1, signifying economies of scale. STICKY COSTS 53 Decrease Dummy is 1 when revenue decreases, the sum of the coefficients, β1 + β2 measures the percentage increase in SG&A costs with a 1% decrease in sales revenue. If SG&A costs are sticky, the variation of SG&A costs with revenue increases should be greater than the variation for revenue decreases. Thus, the empirical hypothesis for stickiness, conditional on β1 > 0 is β2 < 0.4 3.1 DESCRIPTION OF DATA The primary variables used in our analysis are SG&A costs (annual Compustat #189) and net sales revenue (annual Compustat #12). The data set includes annual data for industrial firms covering the 20 years from 1979 to 1998. Data were drawn for all firms included in the PST (primary, supplementary, and tertiary) and full-coverage files of Compustat 1999. We sc...
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This document was uploaded on 09/24/2013.

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