The Agency Problem, Corporate Governance, And The Asymmetrical Behavior Of Selling, General, And Administrative Costs

Selling, general, and administrative（SG&A）costs represent a significant proportion ofthe costs of business operations. Understanding SG&A spending is thus important toresearchers and practitioners. Recent empirical research indicates that costs behaveasymmetrically. When demand increases, cost increase more rapidly. Contrary to this whendemand decreases, cost decline slowly. This phenomenon also labeled “cost stickiness’’. It isworth much attention in the accounting literature.Prior studies have predominantly explained cost stickiness with economic factors suchas asset intensity and uncertainty of future demand, ignoring the impact of managerialincentives on cost behavior. So this paper, based on the empire building and the downsizingliteratures, put forward the following two research questions:（i） After controlling forknown economic determinants of this asymmetry, is SG&A cost asymmetry positively relatedto the agency problem,?（ii） Does strong corporate governance mitigate any positiveassociation between the agency problem and SG&A cost asymmetry?According to specific situation of the listed companies in China, we exam financial andgovernance data over the period2008-2011for firms. First, we use three variables to capturemanagers’ empire building incentives arising from the agency problem: free cash flow（FCF）, chief executive officer （CEO） change, and chief executive officer （CEO）compensation. Second, we construct corporate governance factors and use these factors tosplit our sample into two sub-samples based on the strength of corporate governance （aboveand below median factor score）. Finally, we give some advise for the conclusion.As result,（i）these is a positive correlation between agency problem and costasymmetry after controlling legitimate economic factors, But this correlation is insignificant.（ii）But the positive association between the agency problem and cost asymmetry doesn’tbecome less pronounced in the strong governance sub-samples compared with the weakgovernance sub-samples. So we can conclude that both economic factors and agency probleminfluence cost asymmetry. Because of imperfect incentive and restraint mechanisms andcorporate governance mechanisms, management incentives do not play its due role. Anyway,improving the efficiency of corporate governance is better for cost asymmetry.