The Agency Problem, Corporate Governance, and the Asymmetrical Behavior of Selling, General, and Administrative Costs

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The Agency Problem, Corporate Governance, and the Asymmetrical Behavior of Selling, General, and Administrative Costs

The usefulness of SG&A (Selling, general and administrative) costs make practitioners to be attentive on its spending control (Chen, 257). Consequently, researchers and practitioners tend to understand the SG&A costs’ behavior and managers’ role in adjusting the costs. A study completed lately points out that the costs of SG&A seems to behave asymmetrically (Chen, 253). This means that they advance rapidly when demand increases and do not necessarily decrease when demand decreases. This particular phenomenon has attracted much attention as far as the literature of accounting is concerned. Predominantly, previous studies have illustrated cost stickiness with factors of economy such as uncertainty of future demand as well as asset intensity. This has largely ignored the impact of incentives on cost behavior from the management. To address the empirical building as well as the downsizing literature, there is need to answer the following research questions: Is SG&A costs positively associated with agency’s problems? Does corporate governance that is strong mitigate any positive connection between the problem and the agency as well as SG&A cost asymmetry?

The empire building as well as the downsizing arguments needs to be more applicable to stable, maturing firms as opposed to young and grown firms. This is because mature firms are perceived to have more slack resources directed into SG&A costs. The sample is partitioned on the basis of the life cycle stages of each firm. The study suggests that the agency problem provides an explanation for SG&A cost asymmetry. This is evident in firms with weak corporate governance and where SG&A costs create low value.

This research failed to inform large organizations as case studies in its methodology. This would have shown a clear disparity between small and large firms as far as SG&A costs are concerned. However, I agree with the fact that the SG&A costs are positively associated with agency problems. Corporate governance is also vital for organizational success.

The Behavioral Implications of Aggregation on Budget Approval Decisions

Two experiments are undertaken in this study. The experiments are used to portray the effect of aggregated budget proposals on the entire budgetary slack in cases where the superiors cannot agree to an acceptance policy (Schwartz, 7). Studies conducted in the past suggest that attention on fairness will bring about retaliatory behavior should the subordinates requests be perceived as selfish. Aggregation makes costs to be more closely distributed on average. This decreases the possibility that subordinates will have a chance to make abnormal large budget request, which might be viewed as selfish, thereby reducing the likelihood of rejection. In addition, aggregation increases the size of each decision on budget. This may deter superiors from retaliating since it becomes more costly to do so.

The first experiment showed that the aggregation increased the frequency of mutually beneficial budget acceptance. The second experiment portrayed that some increase in budget approval was due to the larger unit of decision. The primary motivator is the superior’s incomplete appreciation for the statistical aggregation effects. Subordinates at times acquire information rents through the process of budgeting. It is evident that when the superior has full and costless powers of commitment, the rents are reduced by aggregation.

The two experiments failed to explain their definition on fairness. Statistical and tangible results should have been adopted as opposed to perceptions. However, the decision unit is a key to budget approval. This is much enhanced by aggregation that makes it impossible for superiors to retaliate. I feel that the subordinates have a role to play as far as budget approval in concerned. Their involvement makes the decision unit larger and hence increased budget approval.

Works cited

Chen, Xiangh, et al. The Agency Problem, Corporate Governance, and the Asymmetrical Behavior of Selling, General, and Administrative Costs. Contemporary Accounting Research, 2012: 252–282. Print.

Schwartz, Sian. The Behavioral Implications of Aggregation on Budget Approval Decisions. Aggregation in Budgeting: An Experiment. 2012. Print.

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