SGA cost stickiness, stock price informativeness, and information asymmetry

This study examines how firm-level selling, general and administrative (SGA) costs respond to stock price informativeness (SPI). Using data from the United States public listed companies for the years 2003 to 2009 covering post-Sarbanes Oxley Act period, we show that SPI, proxied by idiosyncratic volatility, is negatively associated with the subsequent year’s SGA costs. A change model shows asymmetric cost response to changes in SPI and it is attributable, in part, to the cost “stickiness” behavior of firm managers. Managers may be reluctant to increase SGA costs when SPI worsens but will only react when it is critically compelling. This finding is consistent with the learning theory that managers learn about firms’ fundamental values from the market’s feedback and incorporate this new private information in making efficient SGA costs decisions. We also find that the relationship between SPI and SGA costs is dependent on information asymmetry, proxied by firm size, analyst following and bid-ask spreads.