Implications of aggregate selling, general, and administrative expense signals on market returns

This paper investigates the implications of aggregate selling, general, and administrative expense (hereafter, SG&A) signals on future market returns. We define aggregate SG&A signals as positive changes in the aggregate SG&A cost ratio (i.e., the ratio of SG&A to sales) between two periods. Using U.S. public firms from 1975 to 2019 as a sample and estimating the aggregate-level regression models, we find that aggregate SG&A signals are positively associated with market returns in up to three quarters following the quarter in which the SG&A signals become available after controlling for aggregate earnings and other relevant variables. This positive association is more pronounced in quarters of aggregate sales decreases than sales increases. These results suggest that the market is not fully impounding the stock return implications of aggregate cost behaviors. Furthermore, we find that this positive association between aggregate SG&A signals and market returns is partially driven by the cash flow implications and discount rate news embedded in aggregate SG&A signals. Additional tests demonstrate that the overall association between aggregate SG&A signals and future returns is more pronounced in large firms, in cyclical industries, during the post-1990 period, during expansions, and when more controls are included. These results provide further credence to the mechanisms of cash flow and discount rate news. Overall, our study highlights the incremental contribution of aggregate-level cost behaviors to capital market prediction.