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

Posted: 7 Aug 2008 Last revised: 13 Jan 2016

Clara Xiaoling Chen

University of Illinois at Urbana-Champaign - Department of Accountancy

Hai Lu

Singapore Management University; University of Toronto - Rotman School of Management

Theodore Sougiannis

University of Illinois at Urbana-Champaign - Department of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: Feb 11, 2011

Abstract

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.

Keywords: SG&A Cost behavior, cost asymmetry, cost stickiness, agency problem, empire building, downsizing, corporate governance

JEL Classification: D82, M41, G34

Suggested Citation

Chen, Clara Xiaoling and Lu, Hai and Sougiannis, Theodore, The Agency Problem, Corporate Governance, and the Asymmetrical Behavior of Selling, General, and Administrative Costs (Feb 11, 2011). AAA 2009 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=1209162 or http://dx.doi.org/10.2139/ssrn.1209162

Clara Xiaoling Chen (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Hai Lu

Singapore Management University ( email )

60 Stamford Road
Singapore 178900
Singapore

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada

Theodore Sougiannis

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

360 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0555 (Phone)
217-244-0902 (Fax)

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