Cost Stickiness Research Articles

Organized Labor Effects on SG&A Cost Behavior*

ABSTRACTThis study examines how organized labor affects selling, general, and administrative (SG&A) cost behavior. Human capital is emerging as firms' most valuable asset, and we further the understanding of the interaction between employees and SG&A cost behavior. We predict and find that labor cost stickiness is higher for firms facing stronger unions, but the stickiness of SG&A costs is lower. This is consistent with our arguments that in firms with stronger unions, managers' discretionary decision to retain SG&A resources is negatively affected by higher labor adjustment costs that result in the retention of slack labor resources during periods of decreased demand. To assess the robustness of our main findings, we conduct an event analysis of labor union elections and find that SG&A cost stickiness decreases after firms experience new union certification. Cross‐sectional tests also show that the effect of labor union strength on SG&A cost stickiness is more pronounced for firms that are in better financial condition, have higher analyst coverage, and have higher net operating assets. We find a similar effect of union strength on discretionary spending when examining R&D costs. Overall, we contribute to the literature by showing that organized labor has a significant effect on cost behavior, which has implications for financial statement users and financial forecasting.

Cost stickiness: A systematic literature review of 27 years of research and a future research agenda

Recent research has found that the cost response to an equivalent activity change is asymmetric. This study systematically reviews 80 research articles published in 36 journals during the last 27 years (1994–2020). Through three reviews, the study synthesizes, appraises, and extends knowledge on cost stickiness by covering prior studies’ themes, historical development, research impact, theories employed, research country, costs examined, and models used to capture cost stickiness. Despite the evidence on cost stickiness drivers, this study highlights several unexplored determinants that require further research, including culture, idle capacity management, business risks, auditor type, lobbying intensity, and CEO demographic characteristics. As the consequences of cost stickiness are largely unexplored, we call for more research examining its implications at the macro-economic level and for ubiquitous accounting techniques such as CVP analysis, pricing decisions, and cost estimation. Although prior studies have focused on non-financial companies and developed economies, examining cost stickiness in financial firms and developing economies could enrich the literature. As studies are either descriptive or rely primarily on a single theoretical perspective such as the agency and cost asymmetry theories, we call for research that adopts a multi-theoretical framework. Overall, the study discusses several research streams, identifies several literature gaps, and outlines a promising and detailed future research agenda.

Stakeholder orientation and cost stickiness: Evidence from a natural experiment

Using the enactment of state-level constituency statutes that allow firms to consider nonshareholding stakeholders’ interests when making business decisions as a quasi-natural experiment, we study how stakeholder orientation affects asymmetric cost behavior. We employ a difference-in-differences research design and find that the enactment of constituency statutes leads to a significant increase in the degree of operating cost stickiness. We further show that this effect is mainly driven by resource adjustment costs.

The Effect of Corporate Sustainable Management on the Relationship between Cost Stickiness and Earnings Transparency

This study empirically analyzes the relationship between cost stickiness and earnings transparency. Additionally, this study examines the effect of corporate sustainable management (CSM) on the relationship between cost stickiness and earnings transparency. The evaluation scores of Korea Corporate Governance Service (KCGS) are employed to measure CSM activities. The empirical results show that the relationship between cost stickiness and earnings transparency is significant in the negative direction. This means that the more sticky the costs of a firm, the lower the earnings transparency of the firm. In addition, the relationship between the interaction variables of CSM and cost stickiness and earnings transparency is significant in the positive direction. This indicates that CSM activities act as a mechanism to mitigate the negative relationship between cost stickiness and earnings transparency. The findings of this study, which presented the effects of cost stickiness on earnings transparency and the fact that CSM activities act as a device to suppress the opportunistic cost behavior of managers, are expected to provide important implications to investors, external auditors, and supervisors.

Political Institutions and Cost Stickiness: International Evidence

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.

Impacts of Sales Expense and Administrative Cost Stickiness on Earnings Management – Empirical Evidence from Vietnam

This study aims to examine effects of sales cost stickiness and administrative cost stickiness on earnings management level. Next, the authors explore whether financial leverage, company size audit firm type and operating cash flow affect the earnings management level of Vietnamese stock exchanges listed companies. The research sample consists of 249 observations (83 companies excluding companies in the banking, finance and insurance sectors) taken from two Vietnamese stock exchanges, HNX and HOSE. For data analysis we use feasible generalized least square regression method. The research results find that sales expense stickiness and administrative cost stickiness, included in the model, have an impact on earnings management level. Sales cost stickiness has a positive impact, while administrative cost stickiness has an impact (negative) on earnings management level. Besides, operating cash flow has an impact on earnings management level, while company size, financial leverage and audit firm type found out with no effect on earnings management level. The results of the study contribute to helping investors, creditors or others have a more comprehensive view of profits and business results of companies so that they will be able to make rational decisions.

Cost stickiness and the firm\u2019s organizational form: evidence from the property-liability insurance sector

We examine the existence of cost stickiness in the German property-liability insurance sector by analyzing if the percentage increase in administrative costs for a rise in premiums is larger than the percentage decrease in administrative costs for an equivalent drop in premiums. In addition, we analyze if sticky cost behavior depends on insurance firms’ organizational form. Using company-level data from German property-liability insurance firms for the years 2001–2017 and regression analyses, we find that administrative costs are sticky in the insurance sector, as administrative costs increase on average 0.82% per 1% increase in premiums but decrease only 0.6% per 1% decrease in premium income. Moreover, we find that stock insurers exhibit lower levels of cost stickiness, indicating better monitoring mechanisms.

The Effect of Cost Stickiness on the Earnings Management of Companies Listed on the Iraqi Stock Exchange

The purpose of this study is to investigate the relationship between cost stickiness and profit management in companies listed on the Iraqi Stock Exchange. To investigate this issue, data were compiled, and data related to 35 member companies of the stock exchange for the period between 2015 and 2019 were analyzed. Empirical evidence from the hypothesis test suggests a relationship between cost stickiness and earnings management in companies listed on the Iraqi Stock Exchange and that these companies have also used earnings management.

Stakeholder orientation and cost stickiness

We examine the relationship between stakeholder orientation and cost stickiness (i.e., managerial asymmetric resource allocation decisions in response to firms’ activities change). Using the staggered adoption of the U.S. non-shareholder constituency statutes as a proxy for stakeholder orientation, we find strong empirical evidence of a positive relationship between stakeholder orientation and asymmetrical cost behavior. We further show that stakeholder-orientated managers retain slack resources when firms’ activity declines because of agency problems. Our results are robust to alternative model specifications, related sub-sample analysis and various measures of costs.

Competition and slack: The role of tariffs on cost stickiness

AbstractSlack exists when entities hold resources in excess of those required to support current operations. “Sticky” spending is a specific type of slack spending that occurs when a firm reduces spending by less when sales fall than it increases spending when sales rise by an equivalent amount. Changes in a firm's environment affect its propensity to engage in sticky spending. We examine how competition influences sticky spending, positing two hypotheses. First, we hypothesize that competition will be positively associated with firms' investment in sticky spending both for cost of goods manufactured (COGM) and selling, general, and administrative (SG&A). Second, we hypothesize that competition moderates the relation between sticky spending and firm performance. Utilizing variations of tariff rates as exogenous shocks to reflect competition, we measure sticky spending in the firm's COGM and SG&A spending. To empirically verify our hypotheses, we draw data from three different sources, industry‐level tariff data, Compustat, and the Hoberg–Phillips data library, for firms in the manufacturing sector from 1974 through 2017. Our regression analyses confirm that managers maintain more stickiness in spending as competition increases. The market's assessment of firm performance (as measured by Tobin's Q) is largely positively associated with sticky spending as competition increases. This expectation of higher performance is evidenced by immediate improvements in the firm's return on assets (ROA) when we consider COGM spending, but not when we consider SG&A spending.

Consumer Sentiment, Managerial Expectations and Resource Adjustment Decisions

This study presents evidence on the relationship between consumer sentiment and resource adjustment decisions. Consumer sentiment is an important piece of economic information, accepted as a reliable predictor of future economic activity, which is why it should influence managerial expectations underlying future-oriented resource adjustment decisions. In line with these considerations, I find that managers are more likely to retain slack resources following a decrease in sales when consumer sentiment about future business prospects is improving. Managers seem to adopt consumers’ optimism about future economic prospects by deciding to stall resource adjustments until sales recover to avoid current and future adjustment costs, thus increasing firms’ level of sticky cost behavior. Together with various additional analyses, this study provides new insights into managers’ resource adjustment decision-making process and enhances our understanding of the information upon which managers form their expectations.

Research on Cost Stickiness in International Journals: A Bibliometric Study

Contemporary points of view have posited that cost behavior is asymmetrical and tends to be sticky. The purpose of this study is to determine the development of cost behavior research, especially about cost stickiness, in reputable international journals. There are 142 articles that meet the criteria which have been obtained from the Scopus database. Bibliometric analysis has been performed with the help of the VOSviewer application. The results of the analysis show that research related to cost stickiness has increased in the last decade. The cost stickiness research consists of the following clusters: 1) the health industry; 2) labor costs; 3) social, environmental and sustainability issues; 4) corporate governance; 5) specific problems in manufacturing; and 6) leadership characteristics. The topics of research on cost stickiness that are still being researched are related to the role of the environmental community, business strategy, and the role of managerial leadership. In this analysis, the authors also show that articles that treat cost stickiness as an independent variable are limited. Based on the results of this analysis, we provide suggestions regarding opportunities for research on cost stickiness in the future.

Cost Behavior of Decline-Stage firms with High R&D Intensity

Purpose - The purpose of this study is to analyze the cost behavior of firms, taking into account both high R&D intensity and situations in which R&D activities are likely to be performed efficiently. Design/methodology/approach - During the sample period from 2002 to 2019, regression analysis is conducted on the manufacturing firms with December fiscal year listed on KOSDAQ. The degree of R&D expenditure was measured by R&D intensity. The efficient R&D situation is measured as the decline stage firms in the KOSDAQ market, which are relatively smaller than the KOSPI market. Findings Firms in the decline phase and high R&D intensity showed the cost stickiness. Because these firms anticipate an optimistic future, they do little to cut current costs even if their current sales decrease. Research implications or Originality - Firstly, it is confirmed that both the extent of R&D expenditure and the situation in which R&D will be effectively performed are important in the study of cost behavior. Secondly, we present a new perspective on strategy research that favors the use of cost advantage strategy related to cost anti-stickiness for the decline firms.

The Effect of Cost Stickiness on Peer-Based Valuation Models

We investigate how asymmetric cost behavior (also termed cost stickiness) affects peer-based valuation models. Using a sample of U.S. firms for the period 2000–2016, we provide evidence that the higher the degree of a target firm`s level of cost stickiness vis-à-vis its peer group, the greater is the peer-based underestimation of the firm’s market value (downward peer-based valuation bias). Furthermore, we show that the underestimation of firm value is weaker for firms exhibiting potential for agency issues. Overall, our findings suggest the following: First, using information on cost management strategies reduces the downward peer-based valuation bias. Second, investors partially understand and incorporate available information about cost stickiness into their evaluation of firm value, c.p. leading to deviations from the value estimates of the peer-based models. These models generally do not recognize information on cost stickiness as an input factor. Ultimately, the findings support the assumption that investors assess the likelihood that cost stickiness is either driven by economic or non-economic reasons and adapt their value estimate accordingly.

Payout policy, managerial perquisites, and sticky SG&A costs

AbstractBackgroundSticky SG&A costs provide a novel opportunity to investigate whether payout policy serves as a remedy for management overspending on perquisites that are embedded in SG&A expenses. Payout policy, especially under strong governance, may reduce overspending. Another possibility is that management may use sales declines opportunistically to repurchase shares when sales are expected to rebound.MethodsRegression analysis is used to examine the effect of payout mechanisms (dividends, share repurchases, and combinations thereof) and shareholder rights (EIndex) to determine whether managerial overspending on perquisites is reduced through payout policy.ResultsThe results indicate that dividends and share repurchases are associated with reduced SG&A cost stickiness. Payout policy reduces sticky SG&A costs under both strong and weak governance, where dividend payout is significant only for firms with strong governance, and share repurchases primarily significant for firms with weak governance.ConclusionUnder strong governance, dividends are significantly associated with reduced SG&A cost stickiness, supporting agency theory. However, strongly governed dividend payers are only significant when they also repurchase shares. For the weak governance sample, dividends are not significant, but share repurchase is significantly associated with less sticky SG&A costs, consistent with weakly governed management repurchasing shares in times of lower sales to improve earnings per share, reduce SG&A expenses to improve net income, and fund the share repurchases.

Adding Party Building Provisions in Corporate Articles and Enterprise Cost Stickiness: Based on the Interpretation of Party Organization Governance

Adding Party building provisions in corporate articles is conducive to safeguarding the statutory status of Party organizations in the corporate governance structure. And it can help to improve enterprises’ ability of political governance. After implementing this practice, the internal management and decision-making of enterprises might be deeply influenced by Party organizations, and thus the cost control level might be changed. This paper focuses on the impact of this practice on cost stickiness and analyzes its functional mechanism. Cost stickiness refers to the asymmetric cost change in response to sales change, and it reflects the tendency of enterprises to hold on to resources in the downturns. Based on a research sample of A-share listed companies from 2013 to 2018, we apply the difference-in-differences approach to examine the effect of adding Party building provisions in corporate articles on cost stickiness. We manually collect data on listed companies that have implemented this practice. The results show that the stickiness level of enterprise total operating cost is significantly reduced after implementing the practice, and this change is achieved by mitigating the dual agency problems. As the statutory status of Party organizations is established, Party organizations in enterprises have more motivation and ability to participate in the operation and management of enterprises. Thus, managers are subject to greater scrutiny by Party organizations. In this case, managers will constrain their opportunistic behaviors, leading to lower cost stickiness. In addition, Party organizations help to protect the interest of minority shareholders. The increasing difficulty of resource extraction of majority shareholders leads to a reduction in expropriation behaviors such as asset occupation, which in turn lessens enterprise cost stickiness. The participation of Party organizations in corporate governance also means that they guide shareholders and management to make decisions in line with the spirit of the Party by means of cultural publicity and spirit guidance, so as to reduce self-interested behaviors that are contrary to the spirit of the Party, thus alleviating the dual agency problem of enterprises. The findings indicate that Party organization governance contributes to optimizing the resource allocation decision of managers and improving the efficiency of cost management. Further research finds that the relationship between the practice and cost stickiness is moderated by the ownership structure of enterprises, and it is more significant in the case of more dispersed ownership structure, lower ownership constraints, and lower management shareholding. Mediation mechanism tests show that adding Party building provisions in corporate articles can indeed reduce cost stickiness by alleviating the dual agency problems. The innovation of this paper is mainly reflected in two aspects: First, this paper contributes to the literature on the determinants of cost stickiness by documenting a new way of corporate governance. Through combining Party building and cost stickiness, the study examines the impact of political governance on cost stickiness. The findings expand the channel of enterprise cost management. Second, different from the existing research methods, this paper uses the difference-in-differences approach to examine the dynamic changes of cost stickiness before and after the Party building reform. It provides relatively rigorous scientific evidence for the implementation of adding Party building provisions in corporate articles, and provides guidance for Chinese listed companies to properly and effectively embed the Party organization into the corporate governance structure.

Cost stickiness and firm profitability: A study in Saudi Arabian industries

This study examined the impact of cost stickiness on firm profitability in different industrial sectors in Saudi Arabia. The sample size for the study consists of 102 companies listed on Tadawul (Saudi Stock Exchange) from 2009 to 2018. The study estimated a panel regression using pooled OLS, fixed and random effects, and Generalized Method of Moments (GMM). The variable Return on Investment (ROI) is used as a proxy to measure a firm’s profitability. The results of all the three models are similar to each other. The study found a negative and significant correlation between profitability and cost stickiness, indicating firms’ inability to control the selling, general and administrative costs (SG&A), ultimately leading to lower profits. In addition, firm size is positively associated with profitability, indicating that larger firms are more profitable compared to smaller ones, while the leverage is negatively related to profitability, indicating that companies have higher debts.

FINANCING CONSTRAINTS, INTERNAL CONTROL QUALITY AND COST STICKINESS

Managers think that retaining resources is more effective than rebuilding resources after exhausting them. However, financing constraints have brought great uncertainty to this resource decision-making implemented by managers. Data of manufacturing listed firms in China from 2009 to 2017 are used here to explore the impact of financing constraints on cost stickiness. This paper finds that internal financing constraints have a significant promoting effect on cost stickiness, while debt financing constraints and equity financing constraints have a significant restraining effect on cost stickiness. The internal control quality has a moderation effect on this relationship. In a firm with low quality of internal control, internal financing constraints can enhance cost stickiness, but the weakening effect of external financing on cost stickiness is not affected by internal control quality.

전략적 일탈과 비대칭적 원가행태

We investigate the relationship between strategic deviance and cost asymmetry and then examine the effects of a firm’s earnings transparency on these relationships. Within an industry, many firms tend to imitate peers’ strategic choices, but few firms adopt a strategy that deviates from industry norms, called strategic deviance. Recent studies on strategic deviance focus on agency problems arising from information asymmetry in strategically deviant firms. For instance, managers in strategically deviant firms would have more opportunities to pursue earnings management or spend on privileged consumption. Thus, we anticipate that strategic deviance might be associated with cost asymmetry. Our results show that the higher degree of strategic deviance, the higher the cost stickiness. Also, the positive relationship is higher only when a firm’s earnings transparency is lower. Furthermore, we find that the positive effect of strategic deviance on cost stickiness is not associated with deliberate resource commitment decisions by rational managers, ruling out the possibility that the relationship is driven by rational manager’s decision making. These results support the role of agency problems in channeling the positive association between strategic deviance and cost stickiness. We contribute to the literature by enhancing the understanding of deviant strategy and asymmetric cost behavior.

Intellectual Capital And Cost Stickiness: A Modified Value Added Intellectual Coefficient (Mvaic) Approach

This study aims to provide empirical evidence about the relationship between intellectual capital and cost stickiness. Intellectual Capital has been widely studied about its effect on company performance, but still not much has been studied about its effect on cost behavior. Intellectual Capital in this study uses the Modified Value Added Intellectual Capital (MVAIC) approach. The population in this study were all manufacturing companies listed on the Indonesia Stock Exchange (IDX) in 2017 - 2018. The sample in this study was 119 companies which were selected through purposive sampling. The results of this study indicate that the intellectual capital carried out by the company is able to reduce the level of cost stickiness in manufacturing companies in Indonesia. In practice, the IC carried out by the company is able to reduce cost stickiness, so that it can improve the financial performance of the firm.