Journal of Corporate Accounting & Finance
agency theory, dividends, EIndex, EPS target, free cash flow hypothesis, governance, managerial overspending, outcome model, payout policy, share repurchases, sticky costs
Accounting | Business | Corporate Finance
Sticky SG&A costs provide a novel opportunity to investigate whether payout policy serves as a remedy for management overspending on perquisites that are embedded in SG&A expenses. Payout policy, especially under strong governance, may reduce overspending. Another possibility is that management may use sales declines opportunistically to repurchase shares when sales are expected to rebound.
Regression analysis is used to examine the effect of payout mechanisms (dividends, share repurchases, and combinations thereof) and shareholder rights (EIndex) to determine whether managerial overspending on perquisites is reduced through payout policy.
The results indicate that dividends and share repurchases are associated with reduced SG&A cost stickiness. Payout policy reduces sticky SG&A costs under both strong and weak governance, where dividend payout is significant only for firms with strong governance, and share repurchases primarily significant for firms with weak governance.
Under strong governance, dividends are significantly associated with reduced SG&A cost stickiness, supporting agency theory. However, strongly governed dividend payers are only significant when they also repurchase shares. For the weak governance sample, dividends are not significant, but share repurchase is significantly associated with less sticky SG&A costs, consistent with weakly governed management repurchasing shares in times of lower sales to improve earnings per share, reduce SG&A expenses to improve net income, and fund the share repurchases.
Smith, Deborah, "Payout Policy, Managerial Perquisites, and Sticky SG&A Costs" (2021). Business Faculty Publications. 327.
This is the peer reviewed version of the following article: Smith, D.D. (2021). Payout policy, managerial prerequisites, and sticky SG&A costs. Journal of Corporate Accounting & Finance, 32(4), 132-46. doi:10.1002/jcaf.22518, which has been published in final form at https://doi.org/10.1002/jcaf.22518. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions. This article may not be enhanced, enriched or otherwise transformed into a derivative work, without express permission from Wiley or by statutory rights under applicable legislation. Copyright notices must not be removed, obscured or modified. The article must be linked to Wiley’s version of record on Wiley Online Library and any embedding, framing or otherwise making available the article or pages thereof by third parties from platforms, services and websites other than Wiley Online Library must be prohibited.
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