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

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.

Keywords

• fundamental analysis
• cost behavior
• fixed costs
• sticky costs