Determinants of International Differences in Asymmetric Cost Behavior

Abstract

Since costs are a major component of earnings, understanding the impact of country-level factors on earnings through asymmetric cost behavior is important. We posit that countries with a more efficient judicial system and a higher level of development should exhibit greater cost stickiness at the firm level, because these factors facilitate long-term resource commitments by managers. By contrast, strong shareholder protection laws should reduce cost stickiness, because such laws deter empire-building behavior by managers. We test these predictions using Global Compustat data for both developed and developing economies from 1988-2008. The results strongly support our hypotheses, and indicate that these country-level factors are highly economically significant in explaining cross-country variation in asymmetric cost and earnings behavior that remains after controlling for the known firm-level determinants of sticky costs.