Information Environment and Cost Stickiness

Abstract

We examine the effect of firms’ information environment on asymmetric cost behavior (cost stickiness). Using plausibly exogenous variation in firms’ information environment stemming from brokerage closures, we find that the stickiness of selling, general, and administrative (SG&A) costs reduces in response to adverse changes in the information environment. This effect is concentrated in firms characterized, ex ante, by poorer reporting quality, higher information uncertainty, lower institutional holdings, greater financial constraints, and lower resource adjustment costs. Managers respond to adverse information shocks by reducing the stickiness of SG&A costs that are less likely to create future value, thereby paving way for higher enterprise valuation. Our paper contributes to the growing literature on cost behavior research by documenting the link between firms’ external information environment and internal cost management, and presents novel evidence on managers’ altering their cost behavior to generate internal funds when access to external capital is limited.