The Agency Problem, Corporate Governance, and the Asymmetrical Behavior of Selling, General, and Administrative Costs*

TLDR: This article examined the relationship between SG&A cost asymmetry and the agency problem and found that strong corporate governance mitigated any positive association between the agency problems and SG&As cost asymmetric.

Abstract: Selling, general, and administrative (SGA Anderson and Lanen 2007; Balakrishnan and Soderstrom 2009; Banker, Byzalov, and Plehn-Dujowich 2010). Prior studies have predominantly explained cost stickiness with economic factors such as asset intensity and uncertainty of future demand and have largely ignored the impact of managerial incentives on cost behavior. Although Anderson et al. (2003: 49) conjecture that part of SG&A cost asymmetry may be attributable to agency costs, there is no largescale empirical evidence on their conjecture. Drawing on the empire building and the downsizing literatures, we fill the gap in the cost stickiness literature by examining the following two research questions: (i) Is SG&A cost asymmetry positively associated with the agency problem, after controlling for known economic determinants of this asymmetry? (ii) Does strong corporate governance mitigate any positive association between the agency problem and SG&A cost asymmetry? Agency theory predicts that the misalignment of interests between shareholders and managers could lead to agency problems, that is, managers engage in activities for their own benefits rather than the benefits of the firm’s shareholders (Jensen and Meckling 1976). A well-documented agency problem is managerial ‘‘empire building’’, which refers to managers’ tendencies to grow the firm beyond its optimal size or to maintain unutilized