Payout policy, managerial perquisites, and sticky SG&A costs

• Published date: 01 October 2021
• Author: Deborah Drummond Smith
• Date: 01 October 2021
• DOI: http://doi.org/10.1002/jcaf.22518

Received:  July  Accepted:  August 

DOI: ./jcaf.

RESEARCH ARTICLE

Payout policy, managerial perquisites, and sticky SG&A costs

Deborah Drummond Smith Ph.D., CPA Associate Professor

Monte Ahuja College of Business,

Department of Accounting, Cleveland

State University, Cleveland, Ohio, USA

Correspondence

DeborahDrummond Smith, Cleveland

StateUniversity, Cleveland, OH, USA.

Email:D.L.Smith@csuohio.edu

Abstract

Background: 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. Payoutpolicy, especially under

strong governance, may reduce overspending. Another possibility is that man-

agement may use sales declines opportunistically to repurchase shares when

sales are expected to rebound.

Methods: Regression analysis is used to examine the effect of payout mecha-

nisms (dividends, share repurchases, and combinations thereof) and shareholder

rights (EIndex) to determine whether managerial overspending on perquisites is

reduced through payout policy.

Results: The results indicate that dividends and share repurchases are associ-

ated with reduced SG&A cost stickiness. Payoutpolicy 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 signifi-

cant for firms with weak governance.

Conclusion: 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 repur-

chase 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.

KEYWORDS

agency theory, dividends, EIndex, EPS target, freecash flow hypothesis, governance, manage-

rial overspending, outcome model, payout policy,share repurchase, sticky costs

1 INTRODUCTION

According to agency theory, managers will overindulge in

perquisites, but the firm’s owners can reduceoverspending

with payout policy.Most indulgent manag erial perquisites

such as personal services, autos, and luxury items are

recorded as SG&A costs. This is an empirical study to deter-

mine whether payout policy reduces management’s over-

spending on SG&A costs that include perquisites. Previous

studies have not examined empirically whether the com-

mitment to consistent dividend payout will alleviate over-

spending in managerial perquisites. Although the baseline

spending on perquisites is elusive, they are largely con-

tained in SG&A costs, and SG&A costs should move con-

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