In this paper, we investigate the stock market valuation of the intangible asset created by selling, general, and administrative (SG&A) expenditure. Although GAAP requires immediate expensing of SG&A, prior studies show that current SG&A generates future economic benefits, suggesting that it creates an intangible asset. We find that the contemporaneous stock market seems to recognize some of the intangible asset value implicit in SG&A. Positive subsequent returns can be earned in firms with a high SG&A intangible asset value. These excess returns are more likely due to investor mispricing than to risk compensation. Furthermore, we find that both analysts' long-term growth forecast revisions and one-year-ahead forecast errors are positively associated with the future value created by current SG&A, indicating that analysts partially incorporate the intangible SG&A asset value into their forecasts. Overall, the evidence suggests that the capital market only partially recognizes the intangible asset value created by SG&A expenditure.

We investigate analytically and empirically the relationship between demand uncertainty and cost behavior. We argue that with more uncertain demand, unusually high realizations of demand become more likely. Accordingly, firms will choose a higher capacity of fixed inputs when uncertainty increases in order to reduce congestion costs. Higher capacity levels imply a more rigid short-run cost structure with higher fixed and lower variable costs. We formalize this “counterintuitive” argument in a simple analytical model of capacity choice. Following this logic, we hypothesize that firms facing higher demand uncertainty have a more rigid short-run cost structure with higher fixed and lower variable costs. We test this hypothesis for the manufacturing sector using data from Compustat and the NBER-CES Industry Database. Evidence strongly supports our hypothesis for multiple cost categories in both datasets. The results are robust to alternative specifications. Data Availability: All data used in this study are available from public sources.

A fundamental assumption in cost accounting is that the relation between costs and volume is symmetric for volume increases and decreases. In this study, we investigate whether costs are “sticky”—that is, whether costs increase more when activity rises than they decrease when activity falls by an equivalent amount. We find, for 7,629 firms over 20 years, that selling, general, and administrative (SG&A) costs increase on average 0.55% per 1% increase in sales but decrease only 0.35% per 1% decrease in sales. Our analysis compares the traditional model of cost behavior in which costs move proportionately with changes in activity with an alternative model in which sticky costs occur because managers deliberately adjust the resources committed to activities. We test hypotheses about the properties of sticky costs and how the degree of stickiness of SG&A costs varies with firm circumstances.

Sales decreases affect earnings more than sales increases because of cost stickiness. We hypothesize that this correlated omitted variable constitutes a confounding effect in standard asymmetric timeliness models. Controlling for a piecewise linear effect of sales changes in these models decreases the measured asymmetric timeliness significantly and changes inferences about the average level of conservatism and the extent of cross-sectional variation in conservatism. Validation tests confirm that the asymmetry for sales changes is consistent with sticky costs and is distinct from conditional conservatism. Future empirical research on conditional conservatism should recognize the potential confounding effect of sticky costs.

Using a field study approach, we examine two competing perspectives on direct labor variance reporting: some argue that direct labor variance reporting is costly and cumbersome, and should be eliminated; whereas others contend that without direct labor variance information, managers will not be able to monitor workers effectively, causing workers to shirk and worker productivity to decline. Specifically, we investigate the productivity and quality impacts of eliminating direct labor variance reporting with panel data containing 36 months of data from seven experimental plants that eliminated direct labor variance reporting and 11 control plants that did not. The experimental plants experienced a significant decline in labor productivity compared to the control plants. Also, the experimental plants showed an improvement in product quality, indicating that workers reallocate their efforts to other tasks as a result of the change in the information set available to evaluate them.

We study the impact of banking system reforms during a crisis following a period of undisciplined lending. Regulatory changes aimed at strengthening the banks’ capital structure and risk management practices do not have a uniform impact on bank productivity, but rather favor financially sound or strategically privileged banks. We present evidence documenting the differential impact of regulatory reforms on Korean commercial bank productivity over the period 1995–2005. Average technical efficiency of banks decreased during the financial crisis of 1997–1998. It improved following the subsequent bank restructuring and continued to improve through 2005. The capital adequacy ratio is positively associated with banks’ technical efficiency. The non-performing loans ratio is negatively associated with technical efficiency. Both relationships are accentuated during the crisis but attenuated after the reforms.

Accountants examine multiple indicators when assessing whether individual assets are impaired. Different indicators predict cash flows over varying time horizons, and their importance varies with how far into the future individual assets are expected to generate cash flows. We predict that earnings exhibits asymmetric timeliness with respect to multiple indicators, including stock return, sales change, and operating cash flow change, which differentially explain write-downs of current assets, long-lived tangible assets, and indefinite-lived goodwill. We predict an interaction effect between indicators, such that the total impact of several consistent indicators is greater than the sum of their individual impacts. Empirical estimates for U.S. firms are consistent with our predictions and yield new insights about the effects of multiple indicators for both conservatism and impairment research. Our multi-indicator asymmetric models also change inferences about the relative explanatory power of economic factors versus reporting incentives in asset impairments.

This study investigates the association between managerial ability and cost rigidity. Cost rigidity refers to the relative proportion of fixed and variable costs. We expect that high‐ability managers will assess the potential upside congestion and downside default risks and choose an appropriate level of cost rigidity accordingly. Our results show that, on average, high‐ability managers tend to adopt a more rigid cost structure because they are more likely to realize favorable demand, and therefore, they retain higher capacity with more fixed inputs to alleviate potential congestion risk. We further document that firms with high‐ability managers will exhibit a higher (lower) level of cost rigidity when facing higher congestion risk (default risk). Our results are robust to using a propensity score matching method, a CEO turnover subsample, and alternative measures of cost rigidity and managerial ability. Taken together, this study suggests that firms' capacity management choices vary with the level of managerial ability.

The balanced scorecard provides a framework for selecting multiple performance measures that supplement traditional financial measures with operating measures of customer satisfaction, internal processes, and learning and growth activities. An essential aspect of the balanced scorecard lies in its articulation of the linkage between performance measures and business strategy. This study conducts an experiment to assess how individuals' evaluations of the performance of business unit managers depend on strategically linked performance measures of a balanced scorecard. Statistical test results indicate that performance evaluations are influenced by strategically linked measures more than non-linked measures only when evaluators are provided detailed information about business unit strategies. The results also confirm Lipe and Salterio's (2000) finding that evaluators rely more on common measures than on unique measures. Evaluators rely more on strategically linked measures than on common measures when they are provided information on strategic linkages, but the reverse relation holds when they are not.