Abstract

This study examines how value relevance of earnings affects the degree of asymmetrical SG&A cost behavior. After Anderson et al.’s (2003) study, many other pieces of research provide evidence of the existence of asymmetrical cost behavior. A substantial body of research also show the drivers of asymmetrical cost behavior: adjustment costs, the manager’s expectations for future sales, (Anderson et al. 2003; Calleja et al. 2006; Subramaniam and Weidenmier 2003; Banker and Chen 2006a; Banker et al. 2010) and managers’ incentives to maximize their personal wealth (Chen et al. 2012; Dierynck et al. 2012; Kama and Weiss 2013). Besides the incentive of self-interested managers, managers make resource adjustment decisions based on optimal resource planning, considering adjustment costs and the expectations for future demand. The ultimate goal of rational resource planning is to increase the firm value. Accounting performance measures serves a purpose of valuing firm, among which earnings play a critical role and are used broadly for valuation (Collins et al., 1997; Ashbaugh and Olsson, 2002; Caylor et al. 2007). So managers who act in the best interests of shareholders may consider information on value relevance of earnings in the resource adjustment decision-making process in response to demand decline. However, there is little research examining the association between value relevance of accounting information and the degree of cost asymmetry. This study examines whether value relevance may explain asymmetrical cost behavior. Managers whose firm value is closely tied to earnings are likely to accelerate cuts of unused resources in response to sales drop because retaining resources can reduce current earnings, resulting in more rapid decrease of firm value compared to the firms whose value is relatively not closely tied to earnings. Cuts in committed resources beyond optimal level can increase firms’ earnings in periods of sales decline, leading to prevent the rapid decrease of firm value. Thus, this study hypothesizes that the degree of SG&A cost asymmetry is negatively associated with value relevance of earnings. I formally test this prediction using 7,538 firm-year observations for the period 2000-2012. The empirical results support my prediction. The degree of SG&A cost stickiness decreases with the value relevance of earnings. The negative association I document could result from managers whose firm value is closely tied to earnings accelerating reduction in committed resources in response to sales decrease to prevent the rapid decrease of firm value. I evaluate the robustness of my findings by considering cash flows as the supplementary performance measure in estimating the value relevance. Specifically, I use value relevance of earnings and cash flows, and value relevance of cash flows as alternative measures for value relevance of earnings. The result also support my prediction. This study contributes to the literature in the following ways. First, it integrates both financial and management accounting research topics: value relevance and cost behavior. Traditionally, cost behavior has attracted the attention of management accountants only. The current results show that researcher on value relevance benefit from understanding cost behavior as well. Second, this study expands the scope of value relevance research. The focus of value relevance research is usually on finding the factors affecting cross-sectional variation of value relevance of accounting performance. Value relevance itself can be an exogenous factor, as well as an endogenous one. However, there is little research considering value relevance as an explanatory variable which could affect other factors. This study adds to the existing literature by using value relevance factor as an exogenous one to influence firm's other characteristics.

Keywords

• Asymmetrical cost behavior
• SG&A cost
• value relevance
• cash flows from operation

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