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Peer‐based comparison and firms' discretionary cost decisions

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  • Tom Van Caneghem
  • Walter Aerts
  • Oveis Madadian

Abstract

This study investigates whether firms engage in peer‐based benchmarking in their decision‐making regarding selling, general and administrative expenses (SG&A) for a large sample of U.S. listed firms. Peer‐based comparison relates to comparing own performance against the performance of a meaningful reference group of other firms. SG&A are to a large extent discretionary, but optimal levels of (relative) SG&A are hard to assess. Based on the behavioural theory of the firm and institutional theory, we argue that peer‐based comparison is likely to be an important input to managers' SG&A decision processes. Results show that peer‐based comparison significantly drives changes in firms' reported SG&A. In addition, the effect of peer‐based comparison is found to depend on the firm's life cycle stage. Findings further indicate that peer‐based comparison has a significantly stronger effect in reference groups characterised by high(er) SG&A similarity. Results are robust to using several industry classification systems, as well as, multiple approaches to identify firm life cycles.

Suggested Citation

  • Tom Van Caneghem & Walter Aerts & Oveis Madadian, 2021. "Peer‐based comparison and firms' discretionary cost decisions," Australian Economic Papers, Wiley Blackwell, vol. 60(1), pages 163-185, March.
    • Handle: RePEc:bla:ausecp:v:60:y:2021:i:1:p:163-185
    DOI: 10.1111/1467-8454.12199
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