Do changes in the SG&A ratio provide different information about changes in future earnings,analyst forecast revisions,and stock returns under different circumstances? |
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Institution: | 1. School of Business Administration, University of Montana, Missoula, MT 59812, United States;2. College of Business, Colorado State University, Fort Collins, CO 80523, United States;1. School of Management, State University of New York at Binghamton, 4400 Vestal Pkwy E, Binghamton, NY 13902, United States;2. Nanyang Business School, Nanyang Technological University, 50 Nanyang Avenue, Singapore 639798, Singapore;3. School of Business, Rutgers University-Camden, 227 Penn Street, Camden, NJ 08102, United States;1. DCU Business School, Dublin City University, Glasnevin, Dublin 9, Ireland;2. ESC Rennes School of Business, 2 Rue Robert d''Arbrissel, 35065 Rennes, France |
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Abstract: | In fundamental analysis, increases (decreases) in the ratio of selling, general and administrative (SG&A) costs to sales (SG&A ratio) are perceived as negative (positive) signals regarding future firm performance. However, this interpretation focuses on the overall change in the SG&A ratio and ignores the underlying changes in the components of the ratio (sales and SG&A costs). Although prior research examines the changes in the SG&A ratio under some different circumstances, there is no study that examines all the ways that managers adjust costs in reaction to changes in sales. Therefore, I create six subsamples representing all possible combinations of changes in sales, SG&A costs, and the SG&A ratio and test whether changes in the SG&A ratio are informative about future earnings, analyst forecast revisions, and stock returns under these different circumstances. I find that changes in the SG&A ratio in four of my six subsamples provide information about changes in future earnings. I also find that analysts do not impound all of the information contained in the signals into their forecast revisions and in some cases investors appear to understand this fact. |
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