Value creation, performance evaluation and managerial decisions on SG&A expenditure

The existing managerial accounting literature has investigated how firms incentivize and reward managers based on financial and non-financial measures of outcomes to motivate managers to take desired actions, such as expending resources on activities that enhance shareholder value. An alternative approach to induce managers' right action is to alleviate the penalty for input resource expenditure that increases shareholder value. In this study, I focus on the expenditure on selling, general and administrative (SG&A) activities, excluding R&D and advertising. I investigate whether the capital market and the executive labor market recognizes the long-term value generated by SG&A expenditure, how firms design incentive contracts to alleviate the penalty on value-enhancing SG&A expenditure and whether the incentives effectively lead to desired managerial actions.;In the first part of my dissertation, I hypothesize and find that SG&A expenditure generates future economic benefits although it is required to be expensed as a period cost. Analyzing contemporaneous stock returns, I infer that investors do not view all of SG&A expenditure as an expense in the current period, but rather seem to recognize some of the asset value implicit in SG&A. I also document that no excess returns can be earned on SG&A portfolio in subsequent periods. My analysis of executive compensation indicates that the changes in bonus and equity compensation are negatively associated with the change in SG&A expenditure, while the negative association decreases when current SG&A expenditure has a relatively greater impact on future profitability. Overall, the evidence is consistent with the efficiency of the capital market and the executive labor market in recognizing the asset value created by SG&A expenditure despite its expensing for financial reporting purposes. In the second part of this dissertation, I examine how incentives affect managers' expenditure decisions and whether firms make equity grant decisions considering managerial behavior. I hypothesize and find that new grants of equity incentives lead to an increase in SG&A expenditure in companies where SG&A creates a high future value. I also find that firms with high level of SG&A spending grant more new equity incentives when SG&A creates more future value. The evidence is consistent both with managers making rational investment decisions in response to new grants of equity incentives and with firms making efficient grant decisions based on managers' expected behavior.