Abstract
Beginning with Anderson et al., multiple studies have used a common model to investigate “sticky costs.” This model regresses the log change in SG&A on the log change in revenues. However, Balakrishnan et al. assert that the finding of sticky costs is the result of model misspecification, and using an alternative model that regresses the change in costs scaled by lagged revenues on the changes in revenues scaled by lagged revenues, they find no evidence of sticky costs. I assert that their model also suffers from misspecification, and I propose a new model for measuring sticky costs that addresses misspecification in both prior models. Using this model, I again find evidence of sticky costs.
Highlights
This study provides evidence that multiple models used in the sticky cost literature to measure cost changes with respect to changes in revenue are misspecified
Balakrishnan et al [2] (BLS) refute the findings in ABJ and assert that evidence of cost stickiness is the result of misspecification
This finding supports the initial assertion by ABJ and counters the rebuttal by Balakrishnan et al [2] (BLS) by again documenting the existence of sticky costs
Summary
This study provides evidence that multiple models used in the sticky cost literature to measure cost changes with respect to changes in revenue are misspecified. Balakrishnan et al [2] (BLS) refute the findings in ABJ and assert that evidence of cost stickiness is the result of misspecification. The percent change avoids the issues related to the log change, BLS explain that this is not the preferred model choice because firm size and growth affect the relation between the percent change in costs and the percent change in sales.
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