Managerial Empire Building Incentives、corporate Governance And Cost Asymmetry

With the development of economy, cost management in companies is becoming more and more important. Maximizing profits is the goal of most companies, while costs and expenses will have a large impact on this goal. Strengthening cost management has become an important means to improve the economic efficiency of companies and enhance their competitiveness.Traditional cost models often assume that SG&A costs change proportionately with activity levels. However, recent empirical research presents evidence indicating that SG&A costs behave asymmetrically, i.e., they increase more rapidly when demand increases than decline when demand decreases. Agency theory predicts that when it is difficult for shareholders to monitor managerial behavior, managers may have self-interested behavior, which is likely to lead managers to increase SG&A costs too rapidly when demand increases or to delay the cutting of SG&A costs when demand decreases, both of which will result in cost asymmetry. As a typical agency problem, will managerial empire building incentives have an effect on cost asymmetry? At the same time, whether corporate governance, an effective mechanism to mitigate agency problem, affect the association between empire building incentives and cost asymmetry? That is what we’ll study.Our study uses free cash flow, CEO tenure, and fixed pay ratio of CEO’ compensation scheme as proxies for managerial empire building incentives and tests their association with cost asymmetry. Further, we use external and internal corporate governance mechanism such as product market competition, board size, separation of chairman and CEO or not and ownership concentration to test their influence on the association between empire building incentives and cost asymmetry.Our conclusion is:(1) The degree of SG&A cost asymmetry is positively associated with empire building incentives. In detail, the degree of SG&A cost asymmetry is positively associated with a firm’s FCF and CEO tenure; The degree of SG&A cost asymmetry is negatively associated with fixed pay ratio of CEO’ compensation scheme. (2) The association between the agency problem and the degree of SG&A cost asymmetry is weaker in firms with stronger corporate governance.Our study can help companies to restrain managers’empire building incentives according to firms’free cash flow and managers’features. Moreover, companies can establish effective governance mechanism to manage costs better and optimize the allocation of resources.