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SG&A cost stickiness and equity-based executive compensation: does empire building matter?

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  • Alexander Brüggen
  • Jens Zehnder

Abstract

Cost stickiness is the asymmetrical behavior of costs depending on the direction of the sales change. In this paper we review and test two contradicting notions in prior literature: that of entirely “good” cost stickiness with the CEO acting in the interest of the firm and that of cost stickiness being to some extent “bad” with the CEO engaging in empire building. We test the behavior of SG&A costs in association with interest alignment by equity based payment of the firm’s executive and find that CEOs whose interests are better aligned with those of the shareholders make decisions that lead SG&A costs to exhibit significantly more asymmetry. Specifically, a CEO whose compensation is entirely composed of equity based payment and whose interests can thus be expected to be perfectly aligned with those of the shareholders will make decisions that lead SG&A costs per 1 % change in sales to be more sticky by 0.28 % percentage points. This is in line with the assumption of cost stickiness being “good” and rejects the empire building explanation. We conclude by discussing implications of the results and suggesting directions for further research. Copyright Springer-Verlag Berlin Heidelberg 2014

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  • Alexander Brüggen & Jens Zehnder, 2014. "SG&A cost stickiness and equity-based executive compensation: does empire building matter?," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 25(3), pages 169-192, December.
    • Handle: RePEc:spr:mathme:v:25:y:2014:i:3:p:169-192
    DOI: 10.1007/s00187-014-0195-5
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    2. Zhou, Bing & Li, Yu-meng & Sun, Fang-cheng & Zhou, Zhong-guo, 2021. "Executive compensation incentives, risk level and corporate innovation," Emerging Markets Review, Elsevier, vol. 47(C).
    3. Costa, Mabel D’ & Opare, Solomon, 2022. "Cost asymmetry around seasoned equity offerings," Journal of Behavioral and Experimental Finance, Elsevier, vol. 34(C).
    4. Mohammad Mahdi Rounaghi & Hajer Jarrar & Leo-Paul Dana, 2021. "Implementation of strategic cost management in manufacturing companies: overcoming costs stickiness and increasing corporate sustainability," Future Business Journal, Springer, vol. 7(1), pages 1-8, December.
    5. Lina Fuad Hussien, 2021. "The Impact of CEOs' Compensations on Cost Stickiness in Industrial Companies Listed on the Amman Stock Exchange," Modern Applied Science, Canadian Center of Science and Education, vol. 15(1), pages 152-152, February.
    6. Wulung Li & Ramachandran Natarajan & Yan Zhao & Kenneth Zheng, 2021. "The effect of management control mechanisms through risk-taking incentives on asymmetric cost behavior," Review of Quantitative Finance and Accounting, Springer, vol. 56(1), pages 219-243, January.
    7. Ibrahim, Awad Elsayed Awad & Ali, Hesham & Aboelkheir, Heba, 2022. "Cost stickiness: A systematic literature review of 27 years of research and a future research agenda," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 46(C).
    8. Lijun Ma & Xin Wang & Che Zhang, 2021. "Does Religion Shape Corporate Cost Behavior?," Journal of Business Ethics, Springer, vol. 170(4), pages 835-855, May.
    9. Thomas R. Loy & Sven Hartlieb, 2018. "Have estimates of cost stickiness changed across listing cohorts?," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 29(2), pages 161-181, August.
    10. Yizhao Hong & Chongyan Cao, 2023. "Institutional Investors’ Distraction and Executive Compensation Stickiness Based on Multiple Regression Analysis," JRFM, MDPI, vol. 16(2), pages 1-21, February.
    11. Le, Anh-Tuan & Tran, Thao Phuong & Cheng, Tzu-Chang Forrest, 2022. "Do female directors mitigate asymmetric cost behavior? Evidence from international data," Finance Research Letters, Elsevier, vol. 49(C).
    12. Mabel D. Costa & Ahsan Habib, 2021. "Trade credit and cost stickiness," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(1), pages 1139-1179, March.

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