Corporate Governance and the Asymmetrical Behavior of Selling, General and Administrative Costs: Further Evidence from State Antitakeover Laws

41 Pages Posted: 8 Oct 2013 Last revised: 6 Feb 2014

See all articles by Shimin Chen

Shimin Chen

China Europe International Business School (CEIBS)

Serene Xu Ni

China Europe International Business School (CEIBS)

Donghui Wu

The Chinese University of Hong Kong; Center for Institutions and Governance

Date Written: February 7, 2014

Abstract

While both the economic and agency theory have been proposed to explain cost stickiness, Chen, Lu, and Sougiannis (2012) is the first study that provides evidence to support the agency explanation. To address the endogeneity concern, we extend Chen et al. (2012) by employing state antitakeover laws (ATLs) as an exogenous shock to the corporate governance environment and examine whether the behavior of selling, general and administrative (SG&A) costs changes around the passage of the ATLs. Using the difference-in-differences methodology, we report two primary findings. First, when sales increase, SG&A costs increase significantly more after the enactment of the ATLs, which is consistent with the ATL literature that managers enjoy the “quiet life” after being insulated from an active takeover market. Second and more importantly, we do not find evidence to suggest that managers reduce SG&A costs less in response to sales decline after the passage of the ATLs, which is inconsistent with the agency explanation of cost stickiness. These results hold in settings where we expect the effect of ATLs to be stronger and are robust to sensitivity analyses. Although we would not rule out the agency explanation, our study does cast doubt on the explanation and calls for further research into the reasons behind cost stickiness.

Keywords: antitakeover laws, agency problem, corporate governance, cost stickiness

Suggested Citation

Chen, Shimin and Ni, Serene Xu and Wu, Donghui, Corporate Governance and the Asymmetrical Behavior of Selling, General and Administrative Costs: Further Evidence from State Antitakeover Laws (February 7, 2014). Available at SSRN: https://ssrn.com/abstract=2336916 or http://dx.doi.org/10.2139/ssrn.2336916

Shimin Chen

China Europe International Business School (CEIBS) ( email )

Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206
China

Serene Xu Ni

China Europe International Business School (CEIBS) ( email )

Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206
China

Donghui Wu (Contact Author)

The Chinese University of Hong Kong ( email )

Sha Tin
N.T.
Hong Kong
852-3943 7836 (Phone)
852-2603 5114 (Fax)

HOME PAGE: http://www.bschool.cuhk.edu.hk/staff/wu-donghui/

Center for Institutions and Governance ( email )

Room 1033, 10/F
Cheng Yu Tung Building, No. 12 Chak Cheung Street
Hong Kong
China

HOME PAGE: http://www.bschool.cuhk.edu.hk/centres/centre-for-institutions-and-governance/

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