The Information Content of the SG&A Ratio

Posted: 13 Mar 2010 Last revised: 5 Dec 2010

See all articles by Daniel Baumgarten

Daniel Baumgarten

University of Cologne - Department of Accounting

Ute Bonenkamp

University of Cologne - Department of Accounting

Carsten Homburg

University of Cologne

Date Written: April 15, 2010

Abstract

An increase in the ratio of SG&A costs to sales is associated with contradictory interpretations, namely a negative one due to deficient cost control and a positive one derived primarily from “cost stickiness”. Based on these conflicting explanations, we argue that it is crucial to distinguish between whether or not an increase in the ratio of SG&A costs to sales is actually intended by management, in order to enhance future profitability. We regard an increase as intended if a company’s past SG&A ratio was below its industry average, representing efficiency in SG&A cost management. Indeed, these intended increases significantly enhance future earnings. We attribute this positive impact to lower future cost of goods sold and show that it is particularly strong if there is ample latitude for reduction of these costs. This finding suggests that intended SG&A expenditures partially represent investments in operating efficiency.

Keywords: SG&A ratio, contextual fundamental analysis, cost efficiency, cost stickiness

JEL Classification: D24, G31, M41

Suggested Citation

Baumgarten, Daniel and Bonenkamp, Ute and Homburg, Carsten, The Information Content of the SG&A Ratio (April 15, 2010). Journal of Management Accounting Research, Vol. 22, No. 1, pp. 1-22, 2010, Available at SSRN: https://ssrn.com/abstract=1568743

Daniel Baumgarten (Contact Author)

University of Cologne - Department of Accounting ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany
0049 2124704494 (Phone)
0049 2124705012 (Fax)

HOME PAGE: http://www.controlling.uni-koeln.de/index.php?id=105&L=1

Ute Bonenkamp

University of Cologne - Department of Accounting ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany
0049(0)2214704214 (Phone)
0049(0)2214705012 (Fax)

HOME PAGE: http://www.controlling.uni-koeln.de

Carsten Homburg

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

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