Political Institutions and Cost Stickiness: International Evidence

Abstract

This study explores the association between political institutions and cost stickiness. Prior literature suggests that cost stickiness is driven by the economic implication that pursues firm profits and the agency implication that pursues managers’ benefits. We argue that political institutions affect cost stickiness by constraining government expropriation, which in turn affects the relative importance between these two implications on managerial resource decisions. Using an international sample, we find that strong political institutions are associated with higher cost stickiness. Furthermore, cost stickiness is more likely driven by the economic implication when political institutions are strong and by the agency implication when political institutions are weak, implying that cost stickiness is more likely value-enhancing when political institutions are strong. Mediation analysis reveals that political institutions affect cost stickiness through contract enforcement and corruption control. Our study contributes to the cost behavior literature and the literature about how political institutions affect corporate investment.