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Book part
Publication date: 29 March 2016

Chandra Subramaniam and Marcia Weidenmier Watson

This paper attempts to resolve the conflicting results on sticky cost behavior in prior literature. Large sample studies find that selling, general, and administrative…

Abstract

Purpose

This paper attempts to resolve the conflicting results on sticky cost behavior in prior literature. Large sample studies find that selling, general, and administrative costs (SG&A) and cost of goods sold (CGS) are sticky, that is, costs are less likely to decrease when activity decreases than to increase when activity increases. In contrast, studies limited to one industry find little or no sticky cost behavior.

Methodology/approach

We investigate whether SG&A and CGS sticky cost behavior differ across/ four major industry groups (manufacturing, merchandising, financial, and services) characterized by different production, operational, and economic environments. In addition, we study whether sticky cost behavior arises for all changes in activity level (as measured by revenue changes) or for only large changes in activity level. Finally, we investigate whether determinants of sticky cost behavior vary across industries.

Findings

Our results suggest that costs in the manufacturing industry are the “stickiest,” while costs in the merchandising industry are the “least sticky,” with financial and service industries exhibiting some level of sticky cost behavior. Further, we find that sticky cost behavior is industry-specific, both in the magnitude of activity changes that give rise to sticky cost behavior and in the determinants that drive the behavior.

Research limitations/implications

Our investigation of 20 distinct sub-industries within the “stickiest” manufacturing industry finds that while some sub-industry groupings show significant sticky behavior, most do not. This result may explain why, contrary to large sample studies, single industry studies find little or no sticky behavior in costs.

Originality/value

Our research is the first to try and reconcile the conflicting results on sticky cost behavior. Understanding the pervasiveness of stickiness is necessary to move research forward in this domain.

Details

Advances in Management Accounting
Type: Book
ISBN: 978-1-78441-652-2

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Book part
Publication date: 28 September 2020

Joanna Golden, Mark Kohlbeck and Zabihollah Rezaee

Purpose – The purpose of this study is to investigate whether a firm’s cost structure (specifically, its cost stickiness) is associated with environmental, social, and…

Abstract

Purpose – The purpose of this study is to investigate whether a firm’s cost structure (specifically, its cost stickiness) is associated with environmental, social, and governance (ESG) sustainability factors of performance and disclosure.

Methodology/approach – This study uses MCSI Research KLD Stats (KLD) and Bloomberg databases for the 13-year period from 2003 to 2015 in constructing ESG performance and disclosure variables, respectively. The authors adopt the general cost stickiness models from Anderson, Banker, and Janakiraman (2003) and Banker, Basu, Byzalov, and Chen (2016) to perform the analysis.

Findings – The authors find that a firm’s level of cost stickiness is positively associated with certain sticky corporate social responsibility (CSR)/ESG activities (both overall and when separately classified as strengths or concerns) but not with other nonsticky CSR activities. The authors also show that the association between cost stickiness and ESG disclosure is incrementally stronger for firms with CSR activities classified as sticky. Furthermore, the authors provide evidence that ESG disclosure is greater when both cost stickiness and the degree of sticky CSR activities increase. The authors show that when cost stickiness is high and CSR activities are sticky, management has incentives to increase CSR/ESG sustainability disclosure to decrease information asymmetry.

Originality/value – The findings present new evidence to understand how management integrates cost management strategies with various dimensions of sustainability performance decisions and show that not all ESG activities are equally effective when it comes to cost stickiness. The authors also demonstrate that increased sustainability disclosure helps reduce information asymmetry incrementally more when both costs are sticky and CSR activities are sticky.

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Article
Publication date: 13 January 2020

María Inés Stimolo and Marcela Porporato

Cost behaviour literature is expanding its reach beyond developed economies; however, there is limited knowledge about its causes in emerging economies. This is an…

Abstract

Purpose

Cost behaviour literature is expanding its reach beyond developed economies; however, there is limited knowledge about its causes in emerging economies. This is an exploratory study of sticky costs behaviour determinants in Argentina, a country with periodic political and economic turbulence. The purpose of this paper is to test the effect of GDP, asset intensity, industry and cost type in an inflationary context.

Design/methodology/approach

Anderson et al. (2003) empirical regression (ABJ model) is replicated in Argentina with 667 observations from 96 firms between the years 2004 and 2012. It uses panel data and variables are defined as change rates between two periods. The sample excludes financial and insurance firms. It tests if sticky cost behaviour changes in periods of macroeconomic deceleration, or in firms belonging to industries with different asset intensity levels, or among different cost types.

Findings

The analysis shows that costs are sticky in Argentina, where a superb economic outlook is required to delay cutting resources or increasing costs. Cost behaviour is affected by social and cultural factors, such as labour inflexibility driven by powerful unions and not by protective employment laws, asset intensity (industry) and macroeconomic environment. Results suggest that costs are sticky for aggregate samples, but not for all subsamples.

Practical implications

Administrative costs are sticky when GDP grows; but when growth declines, managers or firms do not delay cost cutting actions. Some subsamples are extreme cases of stickiness while others are anti-sticky, casting some doubt on the usefulness of sticky costs empirical tests applied to country-wide samples. Careful selection of observations for sticky costs studies in emerging economies is critical.

Originality/value

Evidence from previous studies show that on average costs are remarkably sticky in Argentina; this study shows that cost reduction activities occur faster but are not persistent enough to change the aggregated long-term results of cost stickiness in the presence of moderate to high inflation. The study contributes to the literature by suggesting that observations used in sticky costs studies from emerging economies might be mainly from positive macroeconomic environments, might have skewed results due to extreme cases of stickiness or might be distorted by inflation.

Details

Journal of Accounting in Emerging Economies, vol. 10 no. 1
Type: Research Article
ISSN: 2042-1168

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Article
Publication date: 6 February 2017

Awad Elsayed Awad Ibrahim and Amr Nazieh Ezat

The purpose of this paper is to provide further empirical evidence on the asymmetric cost behavior, cost stickiness, in an emerging country, Egypt, which lacks academic…

Abstract

Purpose

The purpose of this paper is to provide further empirical evidence on the asymmetric cost behavior, cost stickiness, in an emerging country, Egypt, which lacks academic research on this subject.

Design/methodology/approach

This study uses multiple regression analysis to analyze the behavior of selling, general, and administrative costs (SG&A) and cost of goods sold (CGS) individually and jointly using total costs (TC) for the period 2004-2011 for Egyptian-listed firms. In addition, the study compares the cost behavior three years prior to and after the application of the corporate governance code in Egypt in 2007.

Findings

The results indicate that asymmetric cost behavior is common among Egyptian-listed firms as their SG&A, CGS, and TC were found to be sticky during the study period. The application of the corporate governance code in Egypt was found to affect the nature of SG&A – the behavior of these costs changed from sticky before the code to anti-sticky after the application of the code. Moreover, the code was found to affect the magnitude of stickiness of both CGS and TC.

Originality/value

Greater awareness about cost behavior is important for emerging markets such as Egypt in order to protect investors’ interests and satisfy their information needs. To the best of our knowledge, this study is the first to provide evidence on cost stickiness in Egypt. Moreover, this study provides further evidence on the correlation between corporate governance and asymmetric cost behavior.

Details

Journal of Accounting in Emerging Economies, vol. 7 no. 1
Type: Research Article
ISSN: 2042-1168

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Article
Publication date: 6 July 2015

Awad Elsayed Awad Ibrahim

This paper aims to examine whether costs respond asymmetrically to demand change, and examine the influence of economic growth on cost stickiness, in the pre- and…

Abstract

Purpose

This paper aims to examine whether costs respond asymmetrically to demand change, and examine the influence of economic growth on cost stickiness, in the pre- and post-2008 financial crisis periods.

Design/methodology/approach

This study uses multiple regression models to investigate the behavior of three costs: selling, general and administrative (SG & A), cost of goods sold (COGS) and operating costs (OCs) for the 2004-2011 period. Moreover, the study compares cost stickiness during the economic prosperity period (2006-2008) with cost stickiness during the economic recession period (2009-2011).

Findings

The results reveal that SG & A increased by 0.38 per cent but decreased by 0.08 per cent, and COGS increased by 1.02 per cent but decreased by 0.57 per cent for a 1 per cent demand change, which proves cost stickiness. However, OC increased by 0.91 per cent, but decreased by 1.03 per cent for a 1 per cent demand change, which proves cost anti-stickiness. Moreover, SG & As were sticky during the prosperity period, but anti-sticky during the recession period. COGSs were sticky in both periods; however, the extent of cost stickiness is larger in the prosperity period. In contrast, OC were statistically insignificant in both periods.

Originality/value

The results imply that managers should not use the same cost model all the time, as the economic growth fluctuations were found to affect the nature and extent of cost behavior. In addition, researchers should provide a modified cost model that considers the nonlinearity of correlation between costs and activity.

Details

Journal of Financial Reporting and Accounting, vol. 13 no. 1
Type: Research Article
ISSN: 1985-2517

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Article
Publication date: 3 June 2019

Shipeng Han, Zabihollah Rezaee and Ling Tuo

The literature suggests that management discretion to adjust resources in response to changes in sales can create asymmetric cost behavior and management incentives to…

Abstract

Purpose

The literature suggests that management discretion to adjust resources in response to changes in sales can create asymmetric cost behavior and management incentives to move stock prices can influence its decision to release management earnings forecasts (MEF). The purpose of this paper is to investigate the association between a firm’s degree of cost stickiness and its propensity to release MEF. The authors propose that both MEF and cost stickiness are influenced by management strategic choices and provide two possible explanations along with supportive evidence. First, when management is optimistic about future performance, it tends to increase both cost stickiness and is willing to disclose the optimistic expectations through MEF. Second, cost stickiness increases information asymmetry between management and investors, thus management tends to issue earnings forecast to mitigate the perceived information asymmetry.

Design/methodology/approach

The authors collect firm-level fundamental data from the COMPUSTAT database, and market data from the CRSP database during 2005 and 2016. The data used to measure variables related to institutional ownership and financial analysts are, respectively, obtained from the Thomson Reuters and the I/B/E/S databases. The quarterly MEF data are from two databases. The authors obtain the data before 2012 the from Thomson First Call’s Company Issued Guidance database and manually collect the data between 2012 and 2016 from the Bloomberg database for the largest 3,000 publicly traded US companies. The measurement of cost stickiness is based on the industry-level measurement developed by Anderson et al. (2003) and the firm-level measurements developed by Weiss (2010). The authors construct two measurements, management’s propensity to issue MEF and the frequency of MEF, to capture management’s voluntary disclosure strategy.

Findings

The analyses of a sample between year 2005 and 2016, indicate that the firm-level cost stickiness is positively associated with the firm’s propensity to issue MEF and the frequency of MEF. Moreover, the authors find that the level of cost stickiness is associated with more favorable earnings news forecasted by management. Additional tests suggest that both information asymmetry and managerial optimism may explain the relationship between cost stickiness and MEF. Finally, the authors find that the association between cost stickiness and MEF behaviors is more pronounced when the resource adjustment cost is high and when the firm efficiency is high. The results are robust after using alternative measurements of cost stickiness and MEF.

Originality/value

First, this paper attempts to build a bridge between managerial accounting and financial accounting by providing evidence of managerial incentives and discretions that affect both cost structure and earnings. The authors contribute to, and complement, prior studies that primarily disentangle the complicated accounting information system by focusing on either the internal information system or the external information system. Second, the paper complements prior studies that examine cost stickiness and its determinants of asymmetric cost behavior by providing additional evidence for the value-relevance of cost stickiness strategy and its link to MEF releases in mitigating information asymmetry. Third, the findings are also relevant to current debates among policymakers, academia and practitioners regarding modernization of mandatory and voluntary disclosures through discussing the managerial incentive behind the managerial disclosure strategies as reflected in MEF releases (SEC, 2013). Fourth, the authors provide evidence regarding management’s role in influencing cost asymmetry and MEF releases, which support the theoretical argument that management discretions affect the firms’ cost structure and MEF disclosures.

Details

Asian Review of Accounting, vol. 28 no. 2
Type: Research Article
ISSN: 1321-7348

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Book part
Publication date: 28 September 2020

David L. Gray

Purpose – This article examines the operating lease cost stickiness characteristics exhibited by retail firms.Methodology/approachAnderson, Banker, and Janakiraman (2003

Abstract

Purpose – This article examines the operating lease cost stickiness characteristics exhibited by retail firms.

Methodology/approachAnderson, Banker, and Janakiraman (2003) laid important groundwork for the study of asymmetric cost behavior or cost stickiness. The authors found that a firm’s selling, general, and administrative costs (SG&A) costs increase more with a sales increase than those expenses decrease with an equivalent sales decline. Their findings provided avenues for many studies with differing focal variables; however, extant research has not explored the degree of cost stickiness associated with operating lease expenses. Recognizing the nature and magnitude of operating leases and the competitive and changing environment for retailers, this study adapts Anderson et al.’s (2003) model to provide insights into operating lease stickiness. The study uses archival financial data from 1997 through 2016 for specialty retail firms in testing the lease cost stickiness hypotheses.

Findings – The results of this study supported the hypotheses that operating lease expenses exhibit stickiness behavior and are relatively stickier than future lease commitments for retail firms.

Originality/value – By focusing on retail firms and related lease expenses, this study provides insights into the increasingly competitive retailer environment. This article’s findings will enhance understanding of how specialty retail firms’ managers react to reduced revenues. Finally, given recent authoritative pronouncements affecting accounting for leases and the significance of leasing transactions, research providing insights into cost behavior and managerial actions stands to make an important contribution to literature and practice.

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Article
Publication date: 13 November 2017

Sandra Cohen, Sotirios Karatzimas and Vassilios-Christos Naoum

The purpose of this paper is to explore the asymmetric cost behaviour in Greek local governments. More precisely, it investigates whether municipality costs show…

Abstract

Purpose

The purpose of this paper is to explore the asymmetric cost behaviour in Greek local governments. More precisely, it investigates whether municipality costs show stickiness or anti-stickiness behaviour after increases or decreases in the stream of their revenues.

Design/methodology/approach

The Anderson et al.’s (2003) approach is adapted to the public sector environment by using types of expenses and revenues typical to the local government setting. The data sample consists of 1,852 observations of Greek municipalities for the period 2002-2008.

Findings

The empirical evidence suggests that local government managers adjust resources related to administrative services faster when revenues decrease than when they rise (anti-stickiness cost behaviour). On the contrary, they adjust costs of service provision which are associated with core activities asymmetrically; more quickly for upward than for downward activity changes (cost stickiness behaviour).

Research limitations/implications

While prior studies examine the sticky cost phenomenon in the private sector, this study explores this phenomenon in the public sector through a data sample of municipalities. Local governments constitute an appealing and unique setting for the examination of asymmetric cost behaviour due to the existence of a strong political influence, which appears to affect rational economic decision making, and their non-profit character, which prevents them from acting in a business-like manner.

Practical implications

Understanding how cost stickiness works inside local understanding how cost stickiness works inside local governments, could lead to an understanding of its implications in periods of cutback measures. Decreases in municipalities’ subsidies and grants as a result of cutbacks in central government expenditures should not be expected to automatically result in symmetric savings in expenditures as corresponding increases in expenditures when revenues used to grow. At the same time, it might be difficult to achieve balanced budgets in municipalities when there is a considerable decrease in revenues, without having to make considerable adjustments to the input values, the output and the mix of services offered by them.

Originality/value

This study contributes to the accounting literature by expanding the understanding of how deliberate decisions influence the asymmetric cost behaviour in local governments, to different cost categories (administrative expenses and cost of service provision) and different revenue categories (grants, tax revenues and revenues from sales of goods and services).

Details

Journal of Applied Accounting Research, vol. 18 no. 4
Type: Research Article
ISSN: 0967-5426

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Article
Publication date: 13 November 2019

Komang Ayu Krisnadewi and Noorlailie Soewarno

With a particular emphasis on corporate strategies for innovation, the purpose of this paper is to examine how cost behaviour operates under conditions of strong…

Abstract

Purpose

With a particular emphasis on corporate strategies for innovation, the purpose of this paper is to examine how cost behaviour operates under conditions of strong competition in the retail industry.

Design/methodology/approach

Retail companies listed on the Indonesian, Singaporean and Malaysian capital markets are studied using the regression analysis method.

Findings

The findings of this study show the sticky behaviour of changes in the selling, general and administrative (SGA) costs when companies are under competitive pressure. When sales increase, SGA costs will increase; however, when sales decline, SGA costs evidently increase. This is especially true for retail companies which have suffered a decrease in their sales of less than 7 per cent, but experienced positive sales growth in the previous period. The suggestion would seem to be that competition leads to greater aggression and the contemporary real options theory bears this out.

Research limitations/implications

This study only uses data from retail companies listed on stock exchanges in Singapore, Indonesia and Malaysia.

Practical implications

The type of industry, the extent of the competition and the corporate strategy employed might influence the extent of cost stickiness. Therefore, the users of financial statements need to understand these factors.

Originality/value

While previous studies incorporated a variety of industries, this paper focuses on examining cost behaviour amid the competitive pressure from recent phenomena in the retail industry. The study provides empirical evidence for supporting the contemporary real options theory. When an industry experiences competition, investing in an uncertain situation will add value to a company, even if it causes sticky cost behaviour. This result contributes to the literature on cost behaviour and strategy management.

Details

Journal of Applied Accounting Research, vol. 21 no. 1
Type: Research Article
ISSN: 0967-5426

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Article
Publication date: 28 January 2020

Yosra Makni Fourati, Rania Chakroun Ghorbel and Anis Jarboui

This paper aims to investigate the impact of cost stickiness on conditional conservatism.

Abstract

Purpose

This paper aims to investigate the impact of cost stickiness on conditional conservatism.

Design/methodology/approach

The research sample consists of listed companies from 18 countries, using stock market indices of the BRICS, MIST, North Africa, USA and EU over the period ranging from 1997 to 2015. The authors use the firm-fixed effects method in the estimation of the models.

Findings

The results provide evidence of the existence of cost stickiness and conditional conservatism in the international context, using the Banker et al. (2016) model. They also argue that the conditional conservatism model (Basu, 1997) is overstated because it does not control for cost stickiness. In additional analyses, the authors conclude that the association between cost stickiness and accounting conservatism changes across country groups and across industries. The authors also document that the employee intensity and free cash-flow, as cost stickiness determinants, remain significant in the model including accounting conservatism. Moreover, the findings show that sticky cost behavior distorts inferences about standard demand drivers of conservatism such as leverage and size.

Originality/value

The findings are interesting and provide a better understanding of cost stickiness and conditional conservatism, and the interaction between these two phenomena in the international context, across country groups and across industries. To the best of the author’s knowledge, the study is the first one including free cash flow as a proxy for agency problem in the full model combining conservatism and cost stickiness models (Banker et al., 2016).

Details

Journal of Financial Reporting and Accounting, vol. 18 no. 1
Type: Research Article
ISSN: 1985-2517

Keywords

1 – 10 of over 2000