Organized Labor Effects on SG&A Cost Behavior*

Abstract

This study examines how organized labor affects selling, general, and administrative (SG&A) cost behavior. Human capital is emerging as firms' most valuable asset, and we further the understanding of the interaction between employees and SG&A cost behavior. We predict and find that labor cost stickiness is higher for firms facing stronger unions, but the stickiness of SG&A costs is lower. This is consistent with our arguments that in firms with stronger unions, managers' discretionary decision to retain SG&A resources is negatively affected by higher labor adjustment costs that result in the retention of slack labor resources during periods of decreased demand. To assess the robustness of our main findings, we conduct an event analysis of labor union elections and find that SG&A cost stickiness decreases after firms experience new union certification. Cross-sectional tests also show that the effect of labor union strength on SG&A cost stickiness is more pronounced for firms that are in better financial condition, have higher analyst coverage, and have higher net operating assets. We find a similar effect of union strength on discretionary spending when examining R&D costs. Overall, we contribute to the literature by showing that organized labor has a significant effect on cost behavior, which has implications for financial statement users and financial forecasting.

Sticky Cost Behavior of Indonesia Stock Exchange Manufacturing Companies

“…After undergoing new union certification, businesses see a reduction in the stickiness of their SG&A costs. Companies who are in better financial shape, have stronger analyst coverage, and have larger net operating assets are the ones that are going to see the influence of labor union power on SG&A cost stickiness play out in a way that is more evident [31].…”

Customers’ managerial expectations and suppliers’ asymmetric cost management

“…It also captures the majority of the overhead costs of managerial choices such as marketing and distribution, staff payroll and expenses, and other administrative overhead costs (C. X. Chen et al., 2012; J. V. Chen et al., 2019). Given the significance, the literature has focused on the understanding of SG&A costs and the role of management in making asymmetric adjustments to SG&A costs (H. Chang et al., 2022; Weiss, 2010). The operations management literature sees SG&A costs as highly relevant.…”

“…Chen et al, 2012; J. V. Chen et al, 2019). Given the significance, the literature has focused on the understanding of SG&A costs and the role of management in making asymmetric adjustments to SG&A costs (H. Chang et al, 2022;Weiss, 2010). The operations management literature sees SG&A costs as highly relevant.…”