Summary of Master Thesis: Testing the Stickiness Behavior of Selling, General and Administrative Expenses in Egyptian Corporations: An Empirical Study

Abstract

Cost stickiness behavior means that cost increases more when activity rises than it decreases when activity falls by an equivalent amount. The presence of cost stickiness behavior is tested in Egyptian firms. A sample of 55 firms (30 manufacturing and 25 nonmanufacturing) over a 7- year, period (2001-2007) containing 274 observations is tested. To correct for inflation sales and SG&A expenses are deflated using the GDP deflator. The data are organized as a panel data model and analyzed using the least squares method. SG&A expenses increase on average by 0.91% per 1% increase in sales but decrease only by 0.28% per 1% decrease in sales, so they exhibit cost stickiness behavior. To test for the effect of cost structure on cost stickiness, three surrogate measures are employed for cost structure. The First measure classifies firms into manufacturing and nonmanufacturing. The test shows that cost stickiness for nonmanufacturing firms is greater than that of manufacturing firms. The second surrogate measure is the degree of assets intensity, which reflects the degree to which the firm depends on assets in its operations. The test supports that the higher the asset intensity in the firm the higher its cost stickiness. The third surrogate measure is the ratio of depreciation to CGS to reflect the proportion of fixed costs in firm’s cost structure. The higher the fixed cost proportion in cost structure, the higher the cost stickiness degree. Another factor tested is demand uncertainty. Three surrogate measures are employed for demand uncertainty: GDP, previous periods sales changes and revenue coefficient of variation. All measures support that when the revenue uncertainty increases, the cost stickiness becomes higher. Results of the study are subject to some limitations such as whether accounting data reflect the real physical operations of the firm. The small sample size in comparison with other prior research and the different ways for calculating and presenting SG&A expenses account among Egyptian firms are additional limitations. Considering cost stickiness in putting plans and budgets might alleviate the firm bearing high costs from slack resources. Also, building an appropriate incentive system in the presence of cost stickiness is another promising direction for future research.