The Agency Problem, Corporate Governance, and the Asymmetrical Behavior of Selling, General, and Administrative Costs

By Clara Xiaoling Chen, Hai-fan Lu, Theodore Sougiannis. 2012

784 citations recorded by the source corpus.

Prior studies have documented the asymmetrical behavior of selling, general and administrative (SG&A) costs (i.e., SG&A costs increase more when activity rises than they decrease when activity falls), and have explained this phenomenon primarily with economic factors. Drawing on agency theory, we argue that SG&A cost asymmetry is driven not only by economic factors but also by the agency problem which causes a shift in SG&A cost asymmetry away from its optimal level. Using data for S&P 1500 firms over the period 1996–2005, we find that the degree of SG&A cost asymmetry is positively associated with managers’ empire building incentives due to the agency problem (measured by free cash flow and CEO horizon, tenure, and compensation structure), suggesting that the agency problem provides an additional explanation for SG&A cost asymmetry. Moreover, we find that strong corporate governance mitigates the positive association between the agency problem and the degree of SG&A cost asymmetry. In additional analyses, we also find that the agency problem influences cost stickiness to a greater extent in mature firms and in firms where SG&A costs create low future value.

Subfields: Accounting, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/f625f1d11829b345aa142b247a3d6d6f3b343b19

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Citations in the corpus

Corporate governance and the profitability of insider trading (2016, background): “ExecuComp Chen et al. (2012), Hazarika et al. (2012), Masulis et al. (2012) and Wintoki et al. (2012).”
The Impact of Changes in Regulation on Cost Behavior (2015, neutral): “2012) or governance (Chen et al. 2011).”
Demand Uncertainty and Cost Behavior (2014, background): “Anderson et al. (2003), Weiss (2010), Chen, Lu, and Sougiannis (2012), Dierynck, Landsman, and Renders (2012), Banker, Byzalov, Ciftci, and Mashruwala (2014), Kama and Weiss (2013), and others explore sticky cost behavior.”
Organization Capital and Sticky Behaviour of Selling, General and Administrative Expenses (2015, methodology): “…on accounting, and more specifically the growing body of work on the sticky cost phenomenon, uses Petersen’s (2009) methodology to choose the most appropriate econometric estimation procedure for a regression model on a panel dataset (Chen et al., 2012; Dierynck et al., 2012; Kama and Weiss, 2013).”
The Moderating Effect of Prior Sales Changes on Asymmetric Cost Behavior (2014, background): “This raises the degree of cost stickiness (Chen et al. 2012).”
SG&A cost stickiness and equity-based executive compensation: does empire building matter? (2014, methodology): “We add the equity compensation variable (CEO_EqComp) in accordance with prior literature (e.g. Calleja et al. 2006; Chen et al. 2012) as an interaction term (CEO_EqComp* DecDummy*log(salest /salest−1)) to measure its impact on cost stickiness and as a singular variable to control for a general impac”
Cost stickiness: state of the art of research and implications (2013, neutral): “Both samples are cross-sectional, however the sample of Chen et al. (2012) covering the time period 1996–2005 is much younger (Anderson et al. 2003 with a time spanof 1979–1998).”
Political Uncertainty and Cost Stickiness: Evidence from National Elections around the World (2020, background): “7 backdrop of extensive evidence on why costs are sticky (Chen et al., 2012; Banker et al., 2013), we directly examine when costs are sticky.”
Does stock price informativeness affect labor investment efficiency (2016, result): “We expect that 1 is positive and 2 is negative, consistent with prior research (e.g., Anderson Banker, and Janakiraman, 2003; Chen et al., 2012; Prabowo et al., 2015) and suggesting that labor costs are sticky.”
State Ownership, Socio-political Factors, and Labor Cost Stickiness (2018, methodology): “AsInt·Dec· lnSales are in line with previous literature (e.g. Anderson et al., 2003; Chen et al., 2012; Dierynck et al., 2012).”
The Confounding Effect of Cost Stickiness on Conservatism Estimates (2016, neutral): “We build on both the research on conservatism in financial accounting (e.g., Basu, 1997; Pope and Walker, 1999; Ball et al., 2000) and the research on sticky costs in cost accounting (e.g., Anderson et al., 2003; Weiss, 2010; Chen et al., 2012).”
Employment Protection Legislation, Adjustment Costs and Cross-Country Differences in Cost Behavior (2012, methodology): “Alternatively, stickiness may arise due to managers’ empire-building behavior (Chen et al., 2011), since empire-building managers will be eager to expand the resources under their control when activity increases but reluctant to”