Implications of asymmetric cost behaviour for analysing financial reports of companies in China

Abstract

Asymmetric cost behaviour analysis emphasises the role of deliberate managerial decisions. In this paper, we find that asymmetric cost behaviour is also a pervasive phenomenon in China. Specifically, SOEs have more cost stickiness than non-SOEs and companies with executive shareholding have more cost stickiness than those without executive shareholding. Secondly, we find that the cost variability and cost stickiness model (separate earnings into cost variability with sales revenue and stickiness in costs with sales declines) provides substantial improvement in forecasting accuracy over other models using only the line items in financial statements. Finally, we find that both conditional conservatism and cost stickiness influence the linear relation between earnings and performance measures. We suggest that future empirical tests on conditional conservatism should control for the potential confounding effect of sticky costs. Our results from Chinese firms provide evidence on the accuracy of earnings forecast and conservatism, and contain important implications for both cost accounting research and financial accounting research.