Cost Stickiness and Stock Price Delay

Abstract

ABSTRACT This study examines the effect of cost stickiness on stock price delay. Using a sample of U.S. firms in the period of 1984–2019, I find that the stickiness of Selling, General, and Administrative (SG&A) costs is positively associated with stock price delay. This finding is consistent with the notion that cost stickiness reduces the quality of information available to investors and causes stock price delay (the direct channel). Using a mediation test, I document that cost stickiness reduces the analyst following of the firm, thus increasing stock price delay (the indirect channel). Cross-sectional analyses reveal that the effect of cost stickiness on stock price delay is prominent in firms characterized ex-ante by a relatively poor information environment. Meanwhile, the effect is weak for firms with managers who use less uncertain and more positive words in Management Discussion and Analysis (MD&A) disclosures within 10-K filings. This study contributes to the growing literature on cost behavior by documenting the adverse consequences of managers’ cost decisions on the capital market and the role of the information environment in mitigating these negative implications.