Abstract
We show that CEOs' contribution to SG&A cost asymmetry is associated with lower shareholder value. CEO‐related excess SG&A cost stickiness of CEOs with compensation less tied to shareholder value creation and high power drive this association. Last, we provide first evidence that cost asymmetry incorporates a harmful element to the firm and shareholders, namely CEO‐related excess SG&A cost asymmetry.
Highlights
Traditional cost models separate costs into fixed and variable costs under the assumption that the variable costs vary symmetrically with activity levels, whereas fixed costs remain constant (Noreen, 1991)
We argue in the hypothesis development section that cost asymmetry arising from CFOs' decisions is not expected to play a significant role for shareholder value, we run our main analysis with CFO- instead of CEO-fixed effects to provide a complete picture
We examine how excess SG&A cost asymmetry resulting from individual CEOs' decisions is associated with shareholder value
Summary
Traditional cost models separate costs into fixed and variable costs under the assumption that the variable costs vary symmetrically with activity levels, whereas fixed costs remain constant (Noreen, 1991). Under an excess capacity assumption, the response of SG&A costs to a decrease in activity level exceeds the SG&A cost response to an equivalent increase in activity, in which case they are labeled “anti-sticky costs” (Banker & Byzalov, 2014). There has been little to no research on the direct effects of top management on the asymmetry of SG&A costs or on its economic consequences. We close this literature gap by investigating how individual CEO-induced SG&A cost asymmetry in excess of the firm-specific level is associated with shareholder value
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