The Information Content of the SG&A Ratio

Abstract

INTRODUCTION Baumgarten et al. 2010 ; hereafter BBH examine the impact of change in the ratio of selling, eneral, and administrative expenses to sales hereafter, SG&A ratio on future profitability. BBH onclude that an intentional increase in the SG&A ratio leads to increased future operating earnngs for the SG&A-efficient firms. Further, they argue that the impact of an intentional increase in he SG&A ratio on future operating earnings is higher for the SG&A-efficient firms, with a lot of cope for improvement in operational cost efficiency. My discussion proceeds along the following lines. First, I discuss their key result that suggests hat future operating profits are improved as a result of increasing current selling, general, and dministrative expenses hereafter, SG&A costs for SG&A-cost-efficient firms. Next, I examine he authors’ claim that future operating profits are improved mainly through a reduction in the uture cost of goods sold. Third, I examine the authors’ assertion that they find evidence that those rms with declining sales, only if they had managed SG&A costs efficiently in the past, will see igher improvements in operating profitability in the future. Finally, I conclude my discussion ith closing remarks.