Equity Incentives and Long-Term Value Created by SG&A Expenditure

56 Pages Posted: 10 Aug 2010

See all articles by Rajiv D. Banker

Rajiv D. Banker

Temple University - Department of Accounting

Rong Huang

City University of New York (CUNY) - Stan Ross Department of Accountancy

Ramachandra (Ram) Natarajan

University of Texas at Dallas - Department of Accounting & Information Management

Date Written: July 28, 2010

Abstract

In this paper we investigate how incentives affect managers’ input resource expenditure decisions and how firms make equity grant decisions considering managerial behavior. Focusing on selling, general and administrative (SG&A) expenditure, we first document that SG&A expenditure creates future value that varies across firms and industries. We hypothesize and find that new equity incentives lead to an increase in SG&A expenditure in companies where SG&A creates a high future value. The extent to which long-term incentives impact managers’ expenditure decisions depends on the future value it creates. We also find that firms with high level of SG&A spending grant more new equity incentives when SG&A creates more future value. The evidence is consistent both with managers making rational investment decisions in response to new equity incentives and with firms making efficient grant decisions based on managers’ expected behavior. Overall, this study documents the importance of considering the future value created by input resource expenditure in examining the association between equity incentives and managerial spending behavior.

Keywords: Input resource expenditure, value creation, SG&A, equity incentives

JEL Classification: J33, M41, M52

Suggested Citation

Banker, Rajiv D. and Huang, Rong and Natarajan, Ramachandra (Ram), Equity Incentives and Long-Term Value Created by SG&A Expenditure (July 28, 2010). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1656563

Rajiv D. Banker

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

Rong Huang (Contact Author)

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
(646)312-3204 (Phone)

Ramachandra (Ram) Natarajan

University of Texas at Dallas - Department of Accounting & Information Management ( email )

2601 North Floyd Road
Richardson, TX 75083-0688
United States
972-883-2739 (Phone)

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