Value relevance of peer-based benchmarking of discretionary expenses and business strategy

Oveis Madadian, Walter Aerts and Tom Van Caneghem

Applied Economics, 2021, vol. 53, issue 32, 3694-3714

Abstract: Research on value relevance of reported selling, general and administrative expenses (SG&A) generally employs historical SG&A as reference point for assessment. This practice tends to ignore the interpretational ambiguity that surrounds the economics of SG&A expenditure and what it means for future profitability and firm value. Organizational theories stress the importance of peer-based benchmarking as an aid for assessment, especially when assessment uncertainty is high, and argue that similarity to peers holds information by lending sensibility, appropriateness and technical value to observed behaviour, thereby reducing assessment uncertainty. Using a sample of listed US firms, we investigate whether SG&A similarity to an industry-specific peer-based benchmark conveys value-relevant information, reducing information asymmetry between firms and investors. We find that only for firms with SG&A exceeding the peer-based benchmark in the previous period, SG&A similarity is associated with higher future financial performance and reduces information asymmetry between firms and investors. We also find that both contemporaneous stock returns and future firm value impound this uncertainty-reducing information conveyed by SG&A similarity. Results further show that the value-relevance of SG&A similarity mainly holds for firms with a Defender-type business strategy and firms from peer groups where business strategies are more similar.

Date: 2021
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DOI: 10.1080/00036846.2021.1885610

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