Mark C. Anderson

Are Selling, General, and Administrative Costs "Sticky"?

A fundamental assumption in cost accounting is that the relation between costs and volume is symmetric for volume increases and decreases. In this study, we investigate whether costs are “sticky”—that is, whether costs increase more when activity rises than they decrease when activity falls by an equivalent amount. We find, for 7,629 firms over 20 years, that selling, general, and administrative (SG&A) costs increase on average 0.55% per 1% increase in sales but decrease only 0.35% per 1% decrease in sales. Our analysis compares the traditional model of cost behavior in which costs move proportionately with changes in activity with an alternative model in which sticky costs occur because managers deliberately adjust the resources committed to activities. We test hypotheses about the properties of sticky costs and how the degree of stickiness of SG&A costs varies with firm circumstances.

Value Implications of Investments in Information Technology

The year 2000 (Y2K) countdown provided a uniquely visible instance of spending on information technology (IT) by U.S. companies. With public attention riveted on potential Y2K malfunctions, managers were forced to evaluate their IT and make decisions about whether to modify or replace existing systems. In the aftermath of Y2K, critics charged that the problem was overblown and that companies overspent on IT. In contrast, we posit in this paper that efforts companies made to renew and upgrade their IT may have positioned them to take advantage of new e-business applications. As Y2K approached, managers could invest opportunistically in IT, which would enable them to connect with customers and suppliers in new ways. Contrary to the alleged overspending, we find that firm value increased, on average, with Y2K spending by Fortune 1000 companies. In particular, higher firm value and subsequent earnings were associated with Y2K spending for firms in industries where IT was considered to have a transforming influence---altering traditional ways of doing business by redefining business processes and relationships. We also test whether the positive association between firm value and Y2K spending diminished with Y2K spending by industry peer firms, but we do not find support for this relative investment hypothesis.

The new productivity paradox

High valuation multiples on IT spending suggest that companies are underinvesting in IT.

Implementing enterprise resource planning systems: organizational performance and the duration of the implementation

This paper examines the impact of the duration of ERP implementation on firm performance both during and after implementation. Organizations choose either an accelerated implementation approach or a traditional (longer) implementation approach. The former approach gives the organization the advantage of speed, but the disadvantage of fitting its processes to that of a packaged (thus, undifferentiated from competitors) ERP. The latter approach allows the organization to redesign strategy and processes, and thus, search for ways to be unique from its competition. The study uses a regression model to capture the changes in various performance measures during and after implementation between firms that implemented the ERP, using the performance measure of a matched group of firms that did not implement an ERP as a benchmark/control sample, on the basis of the duration of the implementation. Financial data from Compustat, and data on start date and end date of ERP implementation between 1990 and 2005 for firms in the Oil and Gas industry was collected from an ERP vendor. Results show that measures such as return on sales improved after implementation. However, measures such as inventory turnover, which reflect operational benefits, improve during implementation. We find that accelerated implementation confers both operational and strategic benefits. This study highlights the strategic consequences of the different choices of implementation.

ERP: drilling for profit in the oil and gas industry

Introduction Most large companies have adopted some form of enterprise resource planning (ERP) system. A survey of IT executives in the U.S. showed that ERP was the second most important key category for investment. In many cases, the implementation of an ERP system was a long and expensive ordeal that involved extensive restructuring of businesses and reengineering of processes. While the potential benefits of ERP have been extolled frequently and much has been written about individual company experiences, only limited evidence has been produced that implementation of ERP does, on average, lead to enhanced performance. To the best of our knowledge, this is the first industry analysis on ERP because previous work has been limited to case studies and industry cross-sectional analyses. Several research studies have validated that IT provides productivity and profitability advantages. However, questions remain because it is not clear whether advantages from IT contribute, and to what degree they might contribute, to operational efficiency and profitability. For example, if the same IT is implemented by all firms in an industry, will industry profits from IT disappear? Due to the fact that for many years large companies developed their information systems independently, there have been limited opportunities to evaluate the implementation of similar IT infrastructure across companies. This study seeks to extend prior work by performing a longitudinal study of implementation of ERP systems in a specific industry. According to Porter, each industry is affected by new information technology in different ways and drawing general conclusions about how new IT affects firms across industries would be a mistake. The oil and gas industry was selected because ERP plays a major role in standardizing business processes in this industry. In this role, ERP helps firms link global operations and supply chains. Also, a commodity-product industry, like the oil and gas industry, helps us control for other influences that may have affected the performance of oil and gas companies during the study period. The ERP adopting firms are those that adopted SAP. This research applies a new methodological approach toward understanding ERP implementation because rather than looking at ordinary measures of firm performance, we look at strategic performance measures (SPM) that can only be utilized if one delves into data that is not found on the financial statements. This is the first study that shows the sources of profitability after an ERP implementation, and will help managers understand the strategic and managerial implications of ERP implementations. Our analysis compares performance changes of ERP adopting firms versus non-adopting firms over a fifteen-year period (1990--2005), which is the period when this industry was being transformed by increased use of technology in the oil and gas industry. Therefore, we see how the implementation of ERP affected firm performance during this period in relation to non-adopting firms.

IFRS and value relevance: evidence based on Canadian adoption

Purpose - – The purpose of this paper is to investigate whether financial information prepared and disclosed under International Financial Reporting Standards (IFRS) has incremental value relevance vs information prepared under generally accepted accounting principles (GAAP) in Canada. Design/methodology/approach - – The authors employ a difference in differences methodology and estimate value relevance using: first, the adjusted Findings - – The authors provide empirical evidence, based on unique Canadian environment, that accounting information prepared and disclosed under IFRS exhibits higher price and returns value relevance than accounting information prepared previously under local GAAP. Sensitivity analyses and yearly trends regressions produce collaborating evidence. Originality/value - – The study provides early empirical evidence that value relevance increases in mandatory IFRS adoption, based on unique Canadian adoption. The Canadian adoption is unique because Canada: first, is the first G7 non-European country to adopt IFRS; second, had pursued a dual strategy of harmonizing with the US GAAP while supporting IFRS convergence; third, provided information environment that mitigates the problems associated with measuring the effects of IFRS adoption in the European countries where IFRS or its predecessor – international accounting standards – had permeated the reporting environment prior to the mandatory adoption in 2005; and fourth, allowed firms listed on the US exchanges to continue to use or adopt the US GAAP for financial reporting and thus, provided a group of benchmark firms drawn from the same social-political and economic environment as the treatment firms. The study clarifies prior inconsistent results from European samples.

Do IFRS Based Earnings Announcements Have More Information Content than Canadian GAAP Based Earnings Announcements

Using event study methodology in a Canadian setting, this paper investigates whether the information content of earnings announcements increased for Canadian Venture Exchange (TSXV) firms and Toronto Stock Exchange (TSX) firms following mandatory adoption of international financial reporting standards (IFRS) in Canada. Comparing the two exchanges is interesting because there is generally more information asymmetry between investors and TSXV firms than between investors and TSX firms. A priori, it may be argued that there would be higher information content in the IFRS based earnings announcements for both TSXV and TSX exchange firms in Canada as compared to the Canadian GAAP based earnings announcements because IFRS allows greater flexibility to provide relevant information. If IFRS enables higher transfer of information through earnings announcements, this may benefit investors in TSXV firms more than investors in TSX firms. However, the additional flexibility to provide relevant information in the IFRS-based annual earnings announcements might reduce reliability by increasing uncertainty in the information of the earnings announcements. Our findings indicate that the information content, measured by abnormal stock return volatility and abnormal trading volume during the announcement period, decreased following the adoption of IFRS for both TSXV firms and TSX firms. The results of this study are relevant for US policy makers in their decision to implement IFRS.

Employee stock options: exercise decisions by top executives

Reviews previous research on the timing of employee stock option exercise decisions and share price performance before and after insider trading. Analyses the 1992‐1993 exercise behaviour of top executives at 65 large US firms using the Black‐Scholes (1973) value (less anticipated dividends) as a benchmark to compare with the intrinsic value (market price minus exercise price) at the date of exercise. Finds options are exercised when the two values are roughly equal, i.e. that executives’ decisions are not risk‐averse or biased by private information. Also shows a tendency for the subsequent change in share prices to be lower when the intrinsic value is less than the Black‐Scholes value at the time of exercise. Considers consistency with other research and the implications of the findings.

Cost Stickiness and Cost Inertia: A Two-Driver Model of Asymmetric Cost Behavior

In the asymmetric cost behavior model, managers play an active role in determining cost behavior by adding or removing resources as activity changes. Cost stickiness occurs when managers deliberately retain slack resources resulting from a decline in sales activity between periods. Because both sales and long-term capital investments change between periods, we estimate a model of cost behavior that includes two cost drivers: revenue as a volume of activity driver and property, plant and equipment (PP&E) as an assets-in-place driver. We associate cost inertia with slack resources retained when assets-in-place are reduced. We find that changes in SG&A costs separate between the two cost drivers, and that the explanatory power of an asymmetric cost behavior model including PP&E as a second driver is significantly greater than the explanatory power of the single-driver cost behavior model. Similar insights are obtained when we replace SG&A costs with employee headcount or employee costs as the cost measure of interest. In all cases, we find that the cost inertia term is significantly negative and relatively large in magnitude. We estimate an expanded model that conditions analysis of current year cost behavior on the direction of sales change in the previous period and find that the pattern of cost changes is consistent with both cost stickiness and cost inertia.

Corporate Social Responsibility, Earnings Management, and Firm Performance: Evidence from Panel VAR Estimation

Previous literature investigates links between corporate social responsibility (CSR), earnings management (EM), and firm performance (FP) but has looked at pair-wise relations (CSR-EM, CSR-FP, and EM-FP) for one-way effects without considering endogeneity among the variables. We examine these relations recognizing endogeneity and possible two-way effects and also consider two additional factors, corporate governance (CG) and management compensation (MC) that may influence the interrelations between firms’ FP, EM and CSR. To examine the complex relationships among these endogenous variables (CSR, EM, PF, CG, and MC) under different eras in management oversight, we divide our complete sample period from 1992 to 2009 into a pre-SOX (Sarbanes-Oxley) period (from 1992 to 2001) and a post-SOX period (from 2002 to 2009), and innovatively employ a rigorous panel vector autoregressive (PVAR) approach. We find three main results: (1) CSR had a positive influence on EM in the pre-SOX period but CSR had no impact on EM post-Sox. (2) There is no relation between CSR and FP pre-SOX, but there are bi-directional relations between them during the post-SOX period: a positive influence of CSR on FP and a negative influence of FP on CSR. (3) FP positively affects EM in both pre- and post-SOX periods.