Institutional Monitoring of Cost Stickiness

Abstract

Cost stickiness measures the degree of suboptimal cost reduction in response to a decline in a firm’s activity. This study reexamines 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 the reduction in cost stickiness leads to superior future market and accounting performance. Our findings are robust to different model specifications and independent of the effect of internal governance.