Competition and SG&A spending

Abstract

The existing literature debates whether selling, general and administrative (SG&A) spending is on average beneficial to shareholders as an asset-like investment or detrimental to shareholders as the result of empire building. I address this debate by examining the behavior and consequence of SG&A spending in the context of product market competition. Using two natural experiment settings of industry deregulation and trade cost changes, I find that competition makes firms more committed to SG&A spending, as reflected in its degree of stickiness when sales decline. Subsample tests confirm the rationale that firms commit to intangible slack resources to avoid underinvestment and predation by competitors, and such slack resources have higher option value in more uncertain competitive environment. I also find that firms with high abnormal SG&A spending capture market share at the expense of their rivals, and such effect increases with competition. Overall, SG&A is on average an asset-like investment, and it plays a strategic role unexplored in the prior literature.