Organized Labor Effects on SG&A Cost Behavior

Posted: 18 Oct 2021

See all articles by Hsihui Chang

Hsihui Chang

Drexel University

Xin Dai

Drexel University

Eric Lohwasser

Colorado State University

Yue Qiu

Temple University

Multiple version iconThere are 2 versions of this paper

Date Written: September 27, 2021

Abstract

This study examines how organized labor affects selling, general, and administrative (SG&A) cost behavior. Human capital is emerging as firms’ most valuable asset, and we further the understanding of the interaction between employees and SG&A cost behavior. We predict and find that labor cost stickiness is higher for firms facing stronger unions, but the stickiness of SG&A costs is lower. This is consistent with our arguments that in firms with stronger unions, managers’ discretionary decision to retain SG&A resources is negatively affected by higher labor adjustment costs that result in the retention of slack labor resources during periods of decreased demand. To assess the robustness of our main findings, we conduct an event analysis of labor union elections and find that SG&A cost stickiness decreases after firms experience new union certification. Cross-sectional tests also show that the effect of labor union strength on SG&A cost stickiness is more pronounced for firms that are in better financial condition, have higher analyst coverage, and have higher net operating assets. We find a similar effect of union strength on discretionary spending when examining R&D costs. Overall, we contribute to the literature by showing that organized labor has a significant effect on cost behavior, which has implications for financial statement users and financial forecasting.

Keywords: organized labor, labor unions, cost stickiness, SG&A costs, labor costs, resource allocation

JEL Classification: M41, J50, D22

Suggested Citation

Chang, Hsihui and Dai, Xin and Lohwasser, Eric and Qiu, Yue, Organized Labor Effects on SG&A Cost Behavior (September 27, 2021). Contemporary Accounting Research, Forthcoming, Fox School of Business Research Paper , Available at SSRN: https://ssrn.com/abstract=3938780

Hsihui Chang

Drexel University ( email )

3141 Chestnut St
Philadelphia, PA 19104
United States

Xin Dai (Contact Author)

Drexel University ( email )

3141 Chestnut St
Philadelphia, PA 19104
United States

Eric Lohwasser

Colorado State University ( email )

Fort Collins, CO 80523
United States

Yue Qiu

Temple University ( email )

Philadelphia, PA 19122
United States

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