| This study investigates deficient inter-temporal matching of accounting costs and benefits. I quantify the net effects of matching problems in selling, general and administrative expenses (SGA) incremental to those caused by the required accounting treatment of research and development (R&D) and advertising. Inadequate matching in R&D and advertising has been established in previous research, hence these items are removed from SGA in this study. With perfect matching, there should be no relationship between past SGA and future accounting profits. However, contrary to this expectation, I document a strong correlation between past SGA and future profits. I use this correlation and estimates of the "normal" level of profitability to construct a measure of SGA capital. For hold out samples, I show that SGA capital is associated with firm value after controlling for net operating assets and R&D intangibles. However, investors appear to not fully assimilate the information provided by SGA capital, as it predicts future stock returns after controlling for fundamental factors such as size, leverage and volatility. |
