Information Environment and Cost Stickiness

Abstract

We examine the effect of the information environment on SG&A cost stickiness. Using analyst brokerage closures as an exogenous adverse shock to firms’ information environment and access to capital, we find that the stickiness of SG&A costs decreases following the loss of analyst coverage. This effect is concentrated in firms characterized, ex-ante, by poorer reporting quality, higher information uncertainty, lower institutional holdings, and greater financial constraints. Interestingly, the effect stems specifically from a reduction in upward cost sensitivity (i.e., the increase in SG&A costs as a proportion of the increase in sales revenue), consistent with managers opting to utilize built-up resources when access to external capital is limited. Further, we find that this change in cost behavior helps firms sustain investments and maintain cash holdings despite adverse changes in the information environment. Overall, we provide evidence that financial shocks incentivize managers to improve cost efficiency.

Keywords: information environment, brokerage closure, SG&A, cost stickiness, asymmetric cost behavior

JEL Classification: M41