Peer-based comparison and firms' discretionary cost decisions

This study investigates whether firms engage in peer-based benchmarking in their decision-making regarding selling, general and administrative expenses (SG&A) for a large sample of U.S. listed firms. Peer-based comparison relates to comparing own performance against the performance of a meaningful reference group of other firms. SG&A are to a large extent discretionary, but optimal levels of (relative) SG&A are hard to assess. Based on the behavioural theory of the firm and institutional theory, we argue that peer-based comparison is likely to be an important input to managers' SG&A decision processes. Results show that peer-based comparison significantly drives changes in firms' reported SG&A. In addition, the effect of peer-based comparison is found to depend on the firm's life cycle stage. Findings further indicate that peer-based comparison has a significantly stronger effect in reference groups characterised by high(er) SG&A similarity. Results are robust to using several industry classification systems, as well as, multiple approaches to identify firm life cycles.