Abstract
The current paper explores the relation between managers’ risk attitude and cost stickiness behavior and the role of demand uncertainty as a moderation variable in the Egyptian business environment. Managers’ risk attitudes are measured using Bo and Sterken (2007) proxy measure [Bo, H., & Sterken, E. (2007). Attitude towards risk, uncertainty, and fixed investment. The North American Journal of Economics and Finance, 18(1), 59–75]. Demand uncertainty is measured by the standard deviation of firms’ sales over the sample period. The study sample includes 114 Egyptian-listed firms over a 14-year period (2004 - 2017) which results in 1,419 firm-year observations. The study models are estimated using the ordinary least squares (OLS) with a fixed-effects model. Findings show that in the presence of high demand uncertainty, risk-averse managers respond to sales decrease by cutting resources which lowers cost stickiness. One of the limitations is that some factors like firms’ policies, corporate governance mechanisms, and board of directors’ characteristics could dilute the effect of manager’s risk attitude on cost stickiness. The current research emphasizes the importance of considering the firm’s operating environment when selecting a manager for the firm, and the role of directed training to align the manager’s personal characteristics with the firm's objectives. The current research contributes to the previous literature by documenting the effect of manager’s risk attitude on cost stickiness and the role of a firm’s demand uncertainty as a moderating variable between these two variables.
Highlights
Since Anderson, Banker, and Janakiraman (2003) empirical evidence on sticky cost behavior which attributes some of the costs behavior to managers’ decisions, a rapid stream of research has documented various factors and determinants of such behavior
The main objective of the current study is to test the effect of management's risk attitude on cost stickiness
Using a sample of 114 Egyptian firms over a 14-year period (2004 - 2017), the current study argues that the manager’s risk attitude is an important factor that affects cost stickiness behavior
Summary
Since Anderson, Banker, and Janakiraman (2003) empirical evidence on sticky cost behavior which attributes some of the costs behavior to managers’ decisions, a rapid stream of research has documented various factors and determinants of such behavior. Anderson et al (2003) state that the main reason for cost stickiness is the manager’s comparison between adjustment costs and costs of bearing slack resources which are named “retention costs” by Brüggen and Zehnder (2014). To expand this comparison, psychological variables and manager’s incentives magnify or diminish costs on both sides i.e., adjustment costs and retention costs. On average, adjustment costs are higher than retention costs
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