Investigating of the Impact of Selling, General, and Administrative Costs Behavior on Future Profitability

Document Type : Research Paper

Authors

Abstract

In the fundamental analysis, it is claimed that an increase in the ratio of selling, general, and administrative costs to sales (SG&A) represents management inefficiency in controlling costs and could be interpreted as negative signal about future profitability. This ignores some important aspects of SG&A cost behavior since both unchanged and sticky costs may cause the ratio of SG&A costs to sales increase. In this case, an increase in the SG&A cost ratio may actually convey positive information about managers’ expectations about future earnings. In this research, the impact of cost behavior on the relationship between future profitability and SG&A ratio was examined, using a sample of 137 firms during 1380 to 1389.
The findings show that there is a negative relationship between future earnings and SG&A cost ratio in sales-increasing periods. But, inconsistent with traditional interpretation of SG&A cost changes, future earnings are positively related to changes in the SG&A cost ratio in the periods in which sales decline, and that the higher the SG&A cost ratio, the stronger the positive relationship between future earnings and SG&A cost ratio. Also, it was found that after eliminating the impact of cost behavior, the increase in SG&A cost ratio causes increase in the future earnings in both revenue-increasing and revenue-decreasing periods.

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References

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History

  • Receive Date: 08 September 2014
  • Revise Date: 05 May 2014
  • Accept Date: 23 August 2014

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