Does Sg&A Expenditure Create a Long-Term Asset?*

41 Pages Posted: 3 Oct 2005 Last revised: 13 Jan 2017

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: September 12, 2006

Abstract

In this paper we investigate whether selling, general and administrative (SG&A) expenditure (excluding R&D and advertising expenditure) creates a long-lived asset. GAAP requires SG&A expenditure to be expensed immediately as a period cost to recognize using up of economic benefits. We hypothesize and find that SG&A expenditure generates future economic benefits and consequently current SG&A expenditure has a positive multi-period impact on subsequent earnings. Analyzing contemporaneous stock returns, we infer that investors do not view all of SG&A expenditure as an expense in the current period, but rather seem to recognize some of the asset value implicit in SG&A by differentiating it from the remaining components of earnings. We also document that no excess returns can be earned in subsequent periods by investment strategies that are based on publicly available SG&A information, suggesting that the contemporaneous stock prices may already fully value the intangible asset created by contemporaneous SG&A expenditure. Our analysis of executive compensation indicates that the changes in bonus and equity compensation are negatively associated with the change in SG&A expenditure, but the negative association decreases when current SG&A expenditure has a relatively greater impact on future profitability. Overall, the evidence suggests that the capital market and the executive labor market recognize the asset value created by SG&A expenditure despite its expensing for financial reporting purposes.

Keywords: SG&A expenditure, advertising expenditure, R&D expenditure, intangible assets, valuation, executive compensation

JEL Classification: G14, J33, M40

Suggested Citation

Banker, Rajiv D. and Huang, Rong and Natarajan, Ramachandra (Ram), Does Sg&A Expenditure Create a Long-Term Asset?* (September 12, 2006). AAA 2007 Management Accounting Section (MAS) Meeting. Available at SSRN: https://ssrn.com/abstract=817824 or http://dx.doi.org/10.2139/ssrn.817824

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)

Register to save articles to
your library

Register

Paper statistics

Downloads
65
rank
334,883
Abstract Views
384
PlumX Metrics