Selling, General, and Administrative Cost Stickiness and GDP Predictions

Abstract

This study examines whether selling, general, and administrative (SG&A) cost stickiness is informative in predicting GDP growth and in explaining GDP forecast errors. Prior research has examined how accounting earnings growth is informative in predicting GDP. However, up to this point there has been a lack of research examining how accounting cost behavior is informative in predicting GDP growth. Managers make SG&A cost decisions based on projections of future demand, so the main hypothesis of this study is that cost stickiness has an informational role in predicting GDP growth and in explaining GDP forecast errors. The empirical findings of this study show that cost stickiness is informative in predicting future GDP growth and is also informative in explaining GDP forecast errors. Industry analysis of this study shows that the cost stickiness of industries selling products with a high income elasticity of demand often predicts positive GDP growth, while the cost stickiness of industries selling products with a low income elasticity of demand can predict negative GDP growth. Additional analysis shows that the cost stickiness of growth firms is a stronger predictor of GDP growth than the cost stickiness of value firms. The empirical results also show that the cost stickiness of high volatility SG&A firms is a more informative predictor of GDP growth than the cost stickiness of low volatility SG&A firms. This study has the potential to contribute to the improvement of GDP growth forecasts. GDP growth forecasts are important because they play a crucial role in federal budgeting and in Federal Open Market Committee monetary policy decisions.