Institutional investors and cost stickiness: Theory and evidence

Abstract

Cost stickiness measures the degree of suboptimal cost reduction in response to a decline in a firm’s activity. This study examines the role of institutional monitoring in addressing the value-decreasing cost-stickiness problem exhibited in many firms. Using alternative proxies for institutional monitoring, we find that long-term institutional investors are associated with reductions in cost stickiness and that these reductions lead to superior future market and accounting performance. Our findings are robust to different model specifications and are independent of the effect of internal governance.