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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 ).
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  and the recent studies of hospital costs
by Noreen and Soderstrom [1994, 1997] and Balakrishnan, Petersen, and Soderstrom .
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
When volume falls, managers must decide whether to...
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This document was uploaded on 09/24/2013.
- Fall '13