Abstract
This paper seeks to extend the literature on cost behavior by providing additional evidence on sticky cost behavior in developing countries namely Egypt. Moreover, it aims to determine to what extent sticky cost behavior affects earnings quality. The paper depends on a sample consists of 38 listed firms in the Egyptian Exchange over the period from 2004 to 2017. The findings reveal that total costs respond asymmetrically to the equivalent change in sales in six of the nine examined sectors. Furthermore, both patterns of sticky cost behavior, stickiness and anti-stickiness, negatively affect earnings quality. Therefore, managers, investors, and managerial accountants should take into account sticky cost behavior when making their decisions. This study contributes to the stream of research that integrates managerial accounting with financial accounting by combining sticky cost behavior with earnings quality. In addition, it extends the line of research related to the impacts of sticky cost behavior. Moreover, it gives new evidence on sticky cost behavior and its impacts from one of emerging countries.
Highlights
Understanding and realizing how costs behave is very considerable especially for managers and managerial accountants since they depend on numerous techniques that require the analysis of cost behavior such as cost-volume-profit analysis
The findings indicated that the accounting conservatism estimate is more accurate when controlling for cost stickiness because accounting conservatism estimate displays a 27.2% upward bias when not controlling for cost stickiness in the model of Basu (1997)
The findings demonstrated that six of nine examined sectors exhibited sticky cost behavior
Summary
Understanding and realizing how costs behave is very considerable especially for managers and managerial accountants since they depend on numerous techniques that require the analysis of cost behavior such as cost-volume-profit analysis. There has been tremendous argument about the essential assumption of cost behavior which is related to the relationship between costs and the activity volume. This assumption alleges that the relationship between change in costs and the activity level is always symmetric or proportional without taking into account the direction of this change. A novel approach of thinking in cost behavior refuted this assumption and proved that some costs change asymmetrically with the change in activity level. This approach has been called “sticky cost behavior”. Cost stickiness means that costs respond to the increase in sales more than their response to the equivalent decrease in sales (Anderson et al 2003), while cost anti-stickiness denotes that costs respond to the increase in sales less than their response to the equivalent decrease in sales (Weiss, 2010)
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