The Influence of the Trade-off between Profitability and Future Increases in Sales on Cost Stickiness: Evidence from Jordan

Mohammad Murdi Alenezi

doi:10.5539/mas.v14n5p19

Abstract

This study aims at analyzing cost stickiness under the dilemma between current profitability and future sales increase. The study population consisted of all Jordanian industrial companies listed on the Amman Stock Exchange (ASE) during the period (2007-2017). The study sample consisted of (30) industrial companies, were used in the analysis. Panel data regression was used to test the relationship between the variables in the study. Results supported the Anderson et al. (2003) argument in that selling, general and administrative expense for Jordanian industrial firms listed in Amman stock exchange (ASE) follow the sticky cost behaviour, they increased by (0.34%) for 1% increase in sales, however, they didn&rsquo;t change by any sales decrease. During sales decline results showed that future sales growth did not have a stressing effect on cost stickiness and didn&rsquo;t drive greater cost stickiness, however, changes in profitability was proved to have a significant positive relation to cost stickiness when sales decrease, meaning that managers apply greater adjustments in SGA (greater cost stickiness) in the case of the attainment of unfavourable changes in profitability. The study recommended a number of recommendations, including Companies should know the factors that affect the cost behavior and take into consideration when analyzing costs and making administrative decisions in companies which will, in turn, improve the process of making administrative decisions and investment decisions.

Highlights

Cost behavior is one of the important topics that attracted the attention of many researchers in the world, because of its impact on administrative decisions that contribute to increasing the company's profits
Traditional theories explaining cost behavior assume that changes in costs are proportional to the change in the volume of activity rather than its direction, several studies have shown that costs have asymmetric behavior, which means that costs tend to increase more quickly with activity than what It decreases with decreased activity
The results showed that there was no significant effect, whether positive or negative for a decline in sales (D / log (St / St-1)) on expenses (log (SGAt / SGAt-1)). This result shows that expenses follow the volume of sales in case of increase only, but in the case of the decrease is not affected, and this is at the core of the definition of sticky costs

Summary

Introduction

Cost behavior is one of the important topics that attracted the attention of many researchers in the world, because of its impact on administrative decisions that contribute to increasing the company's profits. Traditional theories explaining cost behavior assume that changes in costs are proportional to the change in the volume of activity rather than its direction, several studies have shown that costs have asymmetric behavior, which means that costs tend to increase more quickly with activity than what It decreases with decreased activity. This cost behavior has been described as "sticky cost behavior (Kama and Weiss, 2013). This cost behavior has been described as "sticky cost behavior (Kama and Weiss, 2013). Anderson et al (2003) was the first attempt and clearly emphasized the behavior of asymmetric costs (sticky), as the study found that it is accompanied by a decrease in activity, costs have changed less compared to changing it in the case of increased activity at the same level

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