Effects of Capacity Utilization on SG&A Costs Stickiness

Abstract

This study examines the effect of capacity utilization on SG&A costs stickiness and further explores how the stickiness varies with economic factors in association with capacity utilization. We collect the capacity utilization rates data of listed Korean manufacturing firms between 2002 and 2012. First, we find that SG&A costs are sticky (anti-sticky) when the capacity utilization measured at the beginning of the period is high (low). Second, our results suggest that when the adjustment cost in manufacturing operation is higher due to greater asset and production-employee intensity, managers cut SG&A costs more actively to prevent earnings from plunging in sales-decrease periods. Third, we provide an important insight on SG&A cost behavior in the light of supply-chain cost structure. We predict that outsourcing practice enables firms to attain better operating flexibility, thereby reducing the adjustment costs, and find that stickiness of SG&A costs is higher in upstream industries than downstream industries after controlling the effect of current capacity utilization. Finally, we find that the capacity utilization plays more significant role when sales are decreasing over two years but the pattern documented under the single-period sales-change model becomes weak. The significance shifted from a single sales decrease to continuous sales decreases makes sense because the capacity management, and hence capacity utilization, is a long-term aspect. Collectively, we contribute to the literature by examining the implication of capacity utilization on cost behavior with refined measures and provide general large-sample evidence on SG&A costs in contrast to prior studies examining specific cost items.