Managerial Ability and Asymmetric SG&A Cost Behavior

This paper investigates how the degree of cost stickiness is related to managerial ability, and whether managers have good estimations about the firm’s situation. We find that the degree of SG&A costs stickiness is positively associated with managerial ability, and this result is more prevalent when environmental volatility is larger or when the firm is a growth frim where we expect slack resources to be more important. Results remain consistent after controlling for manager’s empire building incentive which is another cause of SG&A slack. In addition, we extend to examine how managers’ compensation incentive system works under different level of managerial ability by means of the degree of cost stickiness. These findings suggest that able managers, who have better knowledge of the firm and the market and who can effectively transforms slack resources into profits, strategically keep slack resources, and they are well-aligned with their compensation incentives.