Perceived scarcity of broad based data that include

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Unformatted text preview: a perceived scarcity of broad-based data that include the costs and relevant drivers. However, data on selling, general, and administrative (SG&A) costs and sales revenue are widely available for a broad set of firms in the Compustat database. The behavior of SG&A costs can be meaningfully studied in relation to revenue activity because sales volume drives many of the components of SG&A (Cooper and Kaplan [1998, p. 341]).2 In its annual SG&A survey, CFO Magazine performs extensive analyses of SG&A costs in relation to sales revenue (Mintz [1999]). SG&A costs made up 26.4% of sales revenue for our broad-based sample of 7,629 firms over a 20-year period. We test for sticky cost behavior by estimating an empirical model that relates changes in SG&A costs to contemporaneous changes in net sales revenue. The model includes an interaction dummy variable that distinguishes between revenue-decreasing and revenue-increasing periods. We document that the percentage increase in SG&A costs for an increase in sales revenue is larger than the percentage decrease in SG&A costs for an equivalent decrease in sales revenue. For our pooled sample of Compustat firms from 1979 to 1998, SG&A costs increased 0.55% per 1% increase in revenue but fell only 0.35% per 1% decrease in revenue. Our observation of sticky cost behavior is robust to alternative estimation procedures including firm-specific time-series estimations, random coefficient regressions, and simultaneous equations models that accommodate potential endogeneity of SG&A costs and sales revenue. The prevalence of sticky costs is consistent with an alternative model of cost behavior in which managers deliberately adjust resources in response to changes in volume. This model distinguishes between costs that move mechanistically with changes in volume and costs that are determined by the resources committed by managers. When there is uncertainty about future demand and firms must incur adjustment costs to reduce or restore committed resources, managers may purposely delay reductions to 1 To the best of our knowledge, the only exceptions in the accounting literature are the study of airline costs by Banker and Johnston [1993] and the recent studies of hospital costs by Noreen and Soderstrom [1994, 1997] and Balakrishnan, Petersen, and Soderstrom [1999]. 2 We use sales revenue as an imperfect proxy for sales volume because sales volume is not directly observable. STICKY COSTS 49 committed resources until they are more certain about the permanence of a decline in demand. This suggests that stickiness observed in one period may reverse in a subsequent period and that stickiness may be less pronounced when the observation period is longer. We provide support for this alternative model by documenting reversal of period t stickiness in period t + 1 and reduction of stickiness with the aggregation of measurement periods. When volume falls, managers must decide whether to...
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This document was uploaded on 09/24/2013.

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