Financial Restatement and Selling, General and Administrative (SG&A) Cost Stickiness

Abstract

Financial restatements have been shown to be associated with management reputation loss and turnover. The literature on cost stickiness has shown that cost stickiness has been associated with both management optimism as well as agency and behavioral issues such as empire building. In this paper, we investigate the relationship between Selling, General and Administrative (SG&A) cost stickiness and financial restatements. We show that SG&A cost stickiness decreased significantly post financial restatements, and the decrease was significantly more in the case of restatements associated with fraud than those not associated with fraud. Our results are consistent with financial restatements acting as a disciplining device for possible managerial excesses, and that firms work harder when fraud was associated with a restatement than when it was not to reduce SG&A cost stickiness.