The Role of Managerial Ability on the Relation between SG&A Cost and Future Profitability

We examine whether managerial ability affects the relation between selling, general, and administrative costs (hereafter, SG&A costs) and future profitability. To operationalize our research question, we employ Baumgarten, Bonenkamp, and Homburg (2010)’s approach in differentiating an increase in the SG&A ratio as managers’ deficient cost control (SG&A cost inefficient firms) versus deliberate investment on input resource (SG&A cost efficient firms), which is intended by the management to improve future performance. Using Korean listed firms from 2000 to 2014, we find that the positive association between changes in SG&A ratio and future operating performance appears only in SG&A cost efficient firms. More importantly, we find that the positive association between changes in SG&A ratio and future operating performance among SG&A-efficient firms is mainly driven by high ability managers. Our findings fill the void in Baumgarten et al. (2010) by providing the evidence that the positive association between an intentional increase in the SG&A ratio and future profitability can be partially explained by high managerial ability.