Abstract
This paper investigates the relationship between business strategy and cost stickiness under different ownership. Using the data from listed firms in China from 2002 to 2015, we find that first, firms with different strategies exhibit different cost behavior. The cost stickiness of choosing a differentiation strategy is higher than that of choosing a low-cost strategy. Second, management expectations will affect cost stickiness. Optimistic expectations will increase cost stickiness, while pessimistic expectations will reduce cost stickiness. Third, management expectations can adjust the relationship between business strategy and cost stickiness in terms of government-created advantages (GCAs). If management expectations tend to be optimistic, the cost stickiness is higher with a differentiation strategy than with a low-cost strategy. If management expectations tend to be pessimistic, then cost stickiness is higher with a low-cost strategy than with a differentiation strategy. Finally, the state-owned equity affects the extent of the effect of a differentiation strategy on cost stickiness. State-owned firms, which receive more GCAs than non-state-owned firms, have stronger cost stickiness than non-state-owned firms, even if both categories of firms use more differentiation strategy.
Highlights
This study uses Porter’s [1] business strategy typology to examine whether companies that follow different business strategies exhibit differences in asymmetric cost behavior and whether firms’ business strategies are a factor in determining cost stickiness
Most of these studies ignore the effect of business strategy on cost stickiness, especially due to management expectations and different state-owned equity—which affects emerging economy firms that have been strongly influenced by their government-created advantages (GCAs)
In this paper, following strategy theory, we argue that managers will deliberately match a firm’s cost structure to the firm’s business strategy by intuitively adjusting how resources are committed depending on their expectation on the sales; in this case, the selection of business strategy will affect the firm’s asymmetric cost behavior
Summary
This study uses Porter’s [1] business strategy typology to examine whether companies that follow different business strategies exhibit differences in asymmetric cost behavior and whether firms’ business strategies are a factor in determining cost stickiness. Recent studies have examined asymmetric cost behavior as a function of managerial deliberate cost adjustment [3,4,5], managerial optimism or pessimism [6], earnings management incentives [7,8], agency problem [9], earnings forecasts [10], capacity utilization [11], unemployment [12], product market competition [13], corporate social responsibility [14], conservatism [15], and whether or not the costs are related to the core operations of a firm [16]. This study is crucial since organizational theory (OT) delivers a framework for understanding how companies’ business strategies can contribute to their competition by cost management
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