Do changes in the SG&A ratio provide different information about changes in future earnings, analyst forecast revisions, and stock returns under different circumstances?

E. Scott Johnson

Advances in accounting, 2016, vol. 34, issue C, 90-98

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.

Keywords: SG&A costs; SG&A ratio; Fundamental analysis; Cost efficiency; Cost behavior; Analysts; Forecast revisions; Stock returns (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:advacc:v:34:y:2016:i:c:p:90-98

DOI: 10.1016/j.adiac.2016.07.010

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