An examination of the effect of classification shifting on the perception of cost stickiness

Abstract

We examine whether classification shifting affects measured cost stickiness. Our evidence is consistent with managers shifting SG&A costs into the restructuring charge category in instances where they are targeting “Street” earnings to meet or beat the analysts’ consensus forecast. Consequently, SG&A costs appear less sticky. We confirm that the decrease in observed cost stickiness for firms we identify as classification shifters is not due to increased operational efficiency and is incremental to spending cuts. We demonstrate that one-year ahead market share for firms that likely cut SG&A spending decreases significantly compared to the market share of firms that we identify as classification shifters. We present evidence that classification shifting via restructuring charges is concentrated in industries where SG&A spending creates high future value.