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Organized Labor Effects on SG&A Cost Behavior
Journal article   Peer reviewed

Organized Labor Effects on SG&A Cost Behavior

Hsihui Chang, Xin Dai, Eric Lohwasser and Yue Qiu
Contemporary accounting research, v 39(1), pp 404-427
28 Dec 2021
DOI: https://doi.org/10.1111/1911-3846.12737

Abstract

Business & Economics Business, Finance Social Sciences
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.

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29 citations in Web of Science
21 citations in Scopus

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Collaboration types
Domestic collaboration
Web of Science research areas
Business, Finance
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