Are Selling, General, and Administrative Costs “Sticky”?

Abstract

A fundamental assumption in cost accounting is that the relation between costs and volume is symmetric for volume increases and decreases. In this study, we investigate whether costs are “sticky”—that is, whether costs increase more when activity rises than they decrease when activity falls by an equivalent amount. We find, for 7,629 firms over 20 years, that selling, general, and administrative (SG&A) costs increase on average 0.55% per 1% increase in sales but decrease only 0.35% per 1% decrease in sales. Our analysis compares the traditional model of cost behavior in which costs move proportionately with changes in activity with an alternative model in which sticky costs occur because managers deliberately adjust the resources committed to activities. We test hypotheses about the properties of sticky costs and how the degree of stickiness of SG&A costs varies with firm circumstances.

Evitar Divulgar Perdas: Um Estudo Empírico do Gerenciamento de Resultados por Meio de Decisões Operacionais

“…Verhagem et al (2011), in a study covering the years 2005 to 2009, look for evidence of financial statement management via operating decisions in Steel and Metallurgy firms listed on the BM&FBOVESPA, as well as analysing whether the corporate governance at these companies provided an incentive or not for such management practices. Adopting the econometric models proposed by Anderson, Banker, and Janakiraman (2003) and Rowchowdhury (2006), they verify that the companies examined a priori managed their financial statements via operating decisions. Moreover, they find that corporate governance provided a counterincentive to earnings management via operating decisions, in terms of SG&A.…”

The influence of size on cost behaviour associated with tactical and operational flexibility

“…According to the methodology of the Farm Accountancy Data Network (FADN) 1 , the data source for our study, revenue is recognized at the moment of production, which provides a better link to activity than the revenue-recognition at the moment of sale, the independent variable employed in Anderson et al (2003).…”

“…Empirical evidence widely support cost stickiness (e.g. Noreen and Sonderstrom, 1997;and Anderson et al, 2003). Further, Balakrishnan et al (2004), Calleja et al (2006) and Balakrishnan and Gruca (2008) studied different subjects related to cost stickiness.…”

Model Misspecification in the Sticky Cost Literature

“…Beginning with Anderson et al [1,2] (ABJ), a relatively new stream of literature has investigated the phenomenon referred to as "sticky costs." ABJ originally coined this phrase and defined it as a larger increase in costs with an increase in revenue than a decrease in costs with a corresponding decrease in revenue.…”

“…They found that the absolute change in costs for an increase in sales was larger than the absolute change in costs for a decrease in sales. This equates to a negative β 2 in equation (1). The authors opined that this may be evidence of a deliberate managerial hesitation to reduce costs in the face of a decrease in sales.…”