Asymmetric Cost Behaviour and Earnings Quality in the European Context

Abstract

This study investigates the relationship of asymmetric cost behaviour with earnings quality for European listed firms. We employ a sample that consists of 11,416 firm-year observations of European listed firms over the period 2005-2019 to explore the relationship of asymmetric cost behaviour with (i) the managerial incentives to meet earnings targets, (ii) conditional conservatism, (iii) the level of operating accruals, and (iv) earnings smoothing. Our empirical evidence indicates that the presence of managerial incentives to meet earnings targets decreases the intensity of SG&A cost stickiness. We also document that asymmetric timeliness estimates in the conditional conservatism estimation models have an upward bias unless these models do not control for asymmetric cost behaviour. Finally, it seems that the level of operating accruals and earnings smoothing are more sensitive to sales decreases than sales increases.