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resources with the purpose of increasing personal utility from status, power, compensation, and prestige (Jensen 1986;Stulz 1990;Masulis, Wang, and Xie 2007;Hope and Thomas 2008). For example, in his seminal paper on managers' utility-maximizing tendencies, Williamson (1963) specifically uses the expansion of staff (proxied by SG&A costs) beyond optimal levels as an example to illustrate the effects of managerial discretion on managers' opportunistic behavior. 1 Despite the relevance of SG&A costs to the empire building literature, empirical work in this literature has focused on more salient, infrequent activities such as mergers and acquisitions (e.g., Titman, Wei, and Xie 2004;Dittmar and Mahrt-Smith 2007;Masulis et al. 2007) while ignoring less salient, ongoing activities such as SG&A expenditures. Because SG&A costs capture most of the overhead costs incurred in the corporate offices (such as salespersons' salaries and commissions, office payroll and expenses, travel and entertainment), empire building managers are likely to increase SG&A costs too rapidly (e.g., adding office payroll and expenses too quickly) when sales go up or to decrease SG&A costs too slowly (e.g., delaying the reduction of office payroll and expenses) when sales go down. Such behavior will shift SG&A cost asymmetry away from its optimal level and result in greater SG&A cost asymmetry than dictated by economic factors. This implies a positive relation between the agency problem and the degree of SG&A cost asymmetry, that is, the stronger the empire building incentives, the greater the SG&A cost asymmetry and thus the larger the shift of SG&A costs from their optimal levels. 2 Moreover, the economics and management literatures have also drawn on agency theory to posit that managers have disincentives to downsize because: (i) managers derive monetary and nonmonetary benefits from managing larger and more complex organizations, (ii) any benefits from downsizing accrue primarily to shareholders rather than managers, and (iii) managers may prefer the quiet life and try to avoid the difficult decisions and costly efforts associated with downsizing (Bertrand and Mullainathan 2003; see Datta, Guthrie, Basuil, and Pandey 2010 for a review). While the downsizing literature does not focus exclusively on SG&A costs, it examines factors that underpin SG&A costs, for example, head counts in corporate offices. In particular, this literature suggests that many downsizings target management and white-collar staff rather than the firm's productive core because slack resources are most likely to be found in the former. Researchers in the downsizing literature have used SG&A costs as the primary proxy for slack resources channeled into overhead and staff expenses (e.g., Bourgeois 1981;Singh 1986;Wiseman and Bromiley 1996). To the extent that SG&A costs capture a large portion of the organizational slack that managers should otherwise cut in response to demand declines (e.g., office payroll and expenses), managers' disincentives to downsize will result in...

We examine whether stock prices fully reflect the value of firms' intangible assets, focusing on research and development (R&D). Since intangible assets are not reported on financial statements under current U.S. accounting standards and R&D spending is expensed, the valuation problem may be especially challenging. Nonetheless we find that historically the stock returns of firms doing R&D on average matches the returns on firms with no R&D. For companies engaged in R&D, high R&D intensity has a distinctive effect on returns for two groups of stocks. Within the set of growth stocks, R&D-intensive stocks tend to out-perform stocks with little or no R&D. Companies with high R&D relative to equity market value (who tend to have poor past returns) show strong signs of mis-pricing. In both cases the market apparently fails to give sufficient credit for firms' R&D investments. Our exploratory investigation of the effects of advertising on returns yields similar results. We also provide evidence that R&D intensity is positively associated with return volatility, everything else equal. Insofar as the association reflects investors' lack of information about firms' R&D activity, increased accounting disclosure may be beneficial.

We examine whether stock prices fully value firms' intangible assets, specifically research and development~R&D!. Under current U.S. accounting standards, financial statements do not report intangible assets and R&D spending is expensed. Nonetheless, the average historical stock returns of firms doing R&D matches the returns of firms without R&D. However, the market is apparently too pessimistic about beaten-down R&D-intensive technology stocks' prospects. Companies with high R&D to equity market value~which tend to have poor past returns! earn large excess returns. A similar relation exists between advertising and stock returns. R&D intensity is positively associated with return volatility.

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