Do Earnings Targets and Managerial Incentives Affect Sticky Costs?

This study explores motivations underlying managers’ resource adjustments. We focus on the impact of incentives to meet earnings targets on resource adjustments and the ensuing cost structures. We find that, when managers face incentives to avoid losses or earnings decreases, or to meet financial analysts’ earnings forecasts, they expedite downward adjustment of slack resources for sales decreases. These deliberate decisions lessen the degree of cost stickiness rather than induce cost stickiness. The results suggest that efforts to understand determinants of firms’ cost structures should be made in light of the managers’ motivations, particularly agency‐driven incentives underlying resource adjustment decisions.     

Are Selling,General, and Administrative Costs “Sticky”?

A fundamental assumption in cost accounting is that the relation between costs and volume is symmetric for volume increases and decreases. In this study, we investigate whether costs are "sticky"—that is, whether costs increase more when activity rises than they decrease when activity falls by an equivalent amount. We find, for 7,629 firms over 20 years, that selling, general, and administrative (SG&A) costs increase on average 0.55% per 1% increase in sales but decrease only 0.35% per 1% decrease in sales. Our analysis compares the traditional model of cost behavior in which costs move proportionately with changes in activity with an alternative model in which sticky costs occur because managers deliberately adjust the resources committed to activities. We test hypotheses about the properties of sticky costs and how the degree of stickiness of SG&A costs varies with firm circumstances.     

The bright side of the internal labor market: Evidence from the labor cost stickiness of firms affiliated with privately owned business groups in China

We examine whether having an internal labor market can help a firm affiliated with a privately owned business group (POBG) reduce labor cost stickiness. Our findings suggest that, when a POBG-affiliated firm experiences a decrease in sales, it has lower labor cost stickiness than an otherwise equivalent firm that is not affiliated with a POBG. Specifically, we find that, on average, a POBG-affiliated firm entirely mitigates labor cost stickiness when it has a decrease in sales. In addition, we document that, to adjust its labor cost downward, a POBG-affiliated firm hires fewer employees, rather than paying lower wages. We show that the lower labor cost stickiness is due to movement of employees from the focal firm to other firms within the same POBG. When sales fall, the POBG reallocates excess employees at the focal firm to other firms within the business group via an internal labor market, and the focal firm thereby increases its per capita profit. Moreover, we find that agency cost mediates the impact of a POBG on labor cost stickiness. When the external market is less effective or the POBG headquarters have strong incentives, the effect of POBG affiliation on the reduction in an affiliated firm's labor cost stickiness is more salient.     

Product market competition and cost stickiness

Extant literature on cost stickiness has focused on how firm-specific characteristics affect the asymmetric cost behavior. In this paper, we explore how a firm’s operating environment affects the firm’s cost stickiness. Specifically, we examine the effect of product market competition on cost stickiness since a firm’s investment and cost retention decisions partly depend on how the firm interacts with its rival firms in the product markets. Using two firm-level text-based product market competition measures extracted from management disclosures in firms’ 10-K filings (Li et al. in J Account Res 51(2):399–436, 2013; Hoberg and Phillips in Rev Financ Stud 23(10):3773–3811, 2010; J Polit Econ, 2015), we find strong evidence consistent with cost asymmetry increasing in competition after controlling for known economic determinants of cost stickiness. In additional analyses, we also find that the effect of product market competition on the degree of cost stickiness increases in firms’ financial strength, likely because management in financially stronger firms has more resources for investment expenditures in spite of a sales fall. We also find that cost stickiness is increasing in competition if management is optimistic about future demand, whereas competition is not associated with cost asymmetry if management is pessimistic about future demand. Finally, we find that the relationship between competition and cost stickiness, although statistically insignificant at conventional levels, is more pronounced for single-segment firms relative to multi-segment firms.     

成本粘性研究:来自中国上市公司的经验证据

成本粘性是指当成本随着业务量的变动而变动时,其业务量增加时的成本增加量大于业务量等额减少时的成本减少量,这与大多数管理会计教材中传统的成本性态模型认为成本的变动率和业务量变动的对称性是矛盾的。本文通过对我国927家A股上市公司的2001—2005年的数据测试发现:(1)我国上市公司存在着成本粘性;(2)时间范围越长,成本粘性水平越小;(3)成本粘性与业务量的变化幅度有关,随着收入的大幅下降,成本粘性变小;(4)各个行业和公司属性也影响成本粘性水平,资本密集型和劳动密集型公司成本粘性水平较高。     

Do Accruals Earnings Management Constraints and Intellectual Capital Efficiency Trigger Asymmetric Cost Behaviour? Evidence from Australia

This study examines whether accruals earnings management constraints and intellectual capital (IC) efficiency affect asymmetric cost behaviour by analysing data for the 1990 to 2016 period on firms listed on the Australian Securities Exchange. The analysis reveals that, on average, anti‐sticky cost behaviour occurs when firms have limited ability to engage in accrual earnings management to manipulate earnings in the current year. Further, IC efficiency – particularly human capital efficiency – increases the degree of cost stickiness. This study also finds that the degree of asymmetric cost behaviour is more pronounced in the post‐International Financial Reporting Standards (IFRS) period than in the pre‐IFRS period. The results suggest that the increased asymmetric cost behaviour in the post‐IFRS period derives from higher IC efficiency relative to the pre‐IFRS period. This study presents important implications for external stakeholders because they can consider the extent of earnings management constraints and the extent of firms’ IC efficiency as the determinants of asymmetric cost behaviour when assessing firms’ cost behaviour.     

Asymmetric Cost Behavior and Dividend Policy

Costs are sticky on average, that is, they fall less for sales decreases than they rise for equivalent sales increases. We examine the effect of this asymmetric cost behavior on a firm's dividend policy. Given investors’ aversion to dividend cuts, we predict that firms with higher resource adjustment costs and stickier costs pay lower dividends than their peers because they are less able to sustain any higher level of dividend payouts in the future. We find evidence consistent with this prediction. Further, using a regression discontinuity design that exploits variation in labor adjustment costs generated by close-call union elections, we provide evidence suggesting that the negative relation between cost stickiness and dividend payouts is driven by resource adjustment costs. Our paper sheds new light on the determinants of dividend policy and demonstrates the role of cost behavior in corporate decisions.     

Sticky cost behaviour: evidence from small and medium sized companies

This paper investigates whether cost stickiness occurs in small and medium sized companies using a sample of Italian nonlisted and listed firms during the period 1999–2008. Our findings show that cost stickiness emerges only for the total cost of labour and not for selling, general and administrative (SG&A) costs, cost of goods sold and operating costs. Stickiness of operating costs is only detected in a sample of listed companies. We further contribute to the literature on sticky cost behaviour by discussing critical issues associated with the extant approach of empirical analysis and interpretation of sticky cost behaviour.     

Managerial risk appetite and asymmetry cost behavior: evidence from China

Managerial risk preferences have considerable impacts on a firm’s cost management through committed resource adjustment decisions. We investigate whether a firm’s cost behaviour is influenced by managers’ risk appetite and find that cost stickiness increases with managers’ risk-seeking. The positive relationship between risk-seeking and cost stickiness is weaker for firms with higher levels of manager capacity. We further find that the moderating effect of managerial capacity is more pronounced in non-state-owned enterprises, in less competitive industries, and in areas with lower degrees of marketisation. These results suggest that managers’ personal characteristics are key factors that affect sticky cost behaviour.     

Managerial incentives,options, and cost-structure choices

This study explores the relationship between changes in managerial risk-taking incentives and adjustments of firms’ cost structures, particularly the operating leverage (fixed-to-variable cost ratio). We find managers reduce operating leverage by substituting fixed costs with variable costs, mainly in the selling, general, and administrative (SG&A) and research and development (R&D) cost components, in response to reductions in option-based compensation following the issuance of FAS 123R. Managers facing a decrease in risk-taking incentives adjust operating leverage downward because high operating leverage intensifies the downside potential of earnings. Overall, we present compelling evidence that managers adjust the cost structure of their firms in response to a reduction in risk-taking incentives.     

Cost stickiness and bank loan contracting

This study examines whether and, if so, how borrowers' asymmetric cost behavior (i.e., cost stickiness) is factored into the price and non-price terms of bank loan contracts. We provide strong and reliable evidence that ex-ante, the loan spread increases with cost stickiness after controlling for other known determinants of loan contract terms. Moreover, we find that the effect is more pronounced for borrowers with higher default risk and higher information risk. This is consistent with borrowers' asymmetric cost behavior increasing lenders' uncertainty about the liquidation value of assets, and hence, lenders need to be compensated ex-ante. Additionally, we conjecture that higher cost stickiness may increase the need for ex-post monitoring. Consistent with this conjecture, we find some evidence that lenders impose tighter non-price terms on firms with stickier costs. This study integrates cost stickiness research with the banking literature by showing that banks incorporate borrowers' asymmetric cost behavior into loan contracting terms.     

The rise of robots and the fall of cost stickiness: Evidence from Chinese manufacturers

Industrial robots are increasingly used to perform tasks traditionally assigned to humans. Using a sample of Chinese manufacturers, we examine the impact of robot adoption on firm cost stickiness. We find that robot adoption is associated with less sticky costs. The negative impact of robot adoption on cost stickiness is particularly meaningful for state-owned enterprises and firms with higher labour costs, and becomes significantly stronger after the enactment of China's Labour Contract Law, which significantly increases labour adjustment costs. These findings are consistent with the conjecture that the adoption of robots allows firms to reduce their overall labour adjustment costs.     

The unintended consequence of collateral-based financing: Evidence from corporate cost behavior

This paper examines how real estate appreciation correspondingly changes collateral value, which affects debt structure choices and consequent operating decisions. Specifically, we explore whether collateral-based financing provides a link between real estate values and corporate cost behavior. Our baseline results show that an appreciation of a firm’s real estate assets alleviates its cost stickiness. A further analysis shows that this influence is stronger for firms with less prior bank debt, less dependence on external financing, and a lower leverage ratio. We also observe that the impact of collateral shocks on cost stickiness is more pronounced when selling, general and administrative (SG&A) costs create less future value for mature firms and for firms with weaker external governance. Collectively, our results support the argument that an increase in bank debt arising from collateral value appreciation mitigates agency problems and thus lessens cost stickiness.     

Rollover risk and managerial cost adjustment decisions

Rollover risk is the risk that a firm may not be able to refinance its debt when it becomes due. We investigate whether managers’ resource adjustment decisions are influenced by rollover risk and find that cost stickiness is decreasing in rollover risk. Additionally, the negative relationship between rollover risk and cost stickiness is stronger for firms with higher financial constraints and fewer financing sources. These results suggest that, when faced with elevated rollover risk, managers are willing to forego the benefits from a sticky cost behaviour. Finally, the use of an alternative firm-specific measure of cost stickiness corroborates our main finding.     

Residential Real Estate Brokerage Efficiency from a Cost and Profit Perspective

Using 1994–1995 microeconomic data from the National Association of Realtors (NAR), this article estimates cost and profit X-efficiency levels in the residential real estate brokerage market using traditional and Bayesian stochastic frontier models. We find that firms err more from failure to maximize profits than from failure to minimize costs. To determine what characteristics influence efficiency, we perform a regression analysis. The results show that franchising and firm age are associated with increases in efficiency, while MLS affiliation and producing a balanced output of listings and sales decrease performance. Finally, we estimate economies of scale and find compelling evidence that firms are operating at increasing returns to scale.     

THE EFFECTS OF SPIN-OFFS ON CORPORATE INVESTMENT AND PERFORMANCE

We examine characteristics of firms involved in spin-offs and test whether these spin-offs induce changes in investment incentives and economic performance. We find that firms engaging in spin-offs are larger, more highly leveraged, and have higher asset turnover and lower real asset growth than their industry rivals. We also find that spin-offs generate significant increases in real asset growth and cash flow margin on sales for combined firm measures (spun-off firm plus parent firm). The gains result from increases in real asset growth for parent and spun-off firms, and improvements in cash flow margin on sales for parents. Our evidence is consistent with models in which spin-offs create value by improving investment incentives and economic performance.     

Raising search costs to deter window shopping can increase profits and welfare

Consumers tend to browse products they are interested in and firms often invest resources in selling to them. A consequence, I show, is that it is optimal for a firm to increase the cost of browsing (even though this drives away potential customers) because doing so allows it to target sales efforts at those consumers most likely to buy. Despite representing pure waste, this can increase welfare by facilitating efficient allocation of sales or marketing resources. For a similar reason, consumers often benefit from search costs in aggregate, and prefer them to other means of screening, such as price increases.     

Match your sales force structure to your business life cycle

Although companies devote considerable time and money to managing their sales forces, few focus much thought on how the structure of the sales force needs to change over the life cycle of a product or a business. However, the organization and goals of a sales operation have to evolve as businesses start up, grow, mature, and decline if a company wants to keep winning the race for customers. Specifically, firms must consider and alter four factors over time: the differing roles that internal salespeople and external selling partners should play, the size of the sales force, its degree of specialization, and how salespeople apportion their efforts among different customers, products, and activities. These variables are critical because they determine how quickly sales forces respond to market opportunities, they influence sales reps' performance, and they affect companies' revenues, costs, and profitability. In this article, the authors use timeseries data and cases to explain how, at each stage, firms can best tackle the relevant issues and get the most out of their sales forces. During start-up, smart companies focus on how big their sales staff should be and on whether they can depend upon selling partners. In the growth phase, they concentrate on getting the sales force's degree of specialization and size right. When businesses hit maturity, companies should better allocate existing resources and hire more general-purpose salespeople. Finally, as organizations go into decline, wise sales leaders reduce sales force size and use partners to keep the business afloat for as long as possible.     

Innovation versus complexity: what is too much of a good thing?

What's the number of product or service offerings that would optimize both your revenues and your profits? For most firms, it's considerably lower than the number they offer today. The fact is, companies have strong incentives to be overly innovative in new product development. But continual launches of new products and line extensions add complexity throughout a company's operations, and as the costs of managing that complexity multiply, margins shrink. To maximize profit potential, a company needs to identify its innovation fulcrum, the point at which an additional offering destroys more value than it creates. The usual antidotes to complexity miss their mark because they treat the problem on the factory floor rather than at its source: in the product line. Mark Gottfredson and Keith Aspinall of Bain & Company present an approach that goes beyond the typical Six Sigma or lean-operations program to root out complexity hidden in the value chain. The first step is to ask, What would our company look like if it made and sold only a single product or service? In other words, you identify your company's equivalent of Henry Ford's one-size-fits-all Model T-for Starbucks, it might be a medium-size cup of coffee; for a bank, a simple checking account-and then determine the cost of producing that baseline offering. Next, you add variety back into the business system, product by product, and carefully forecast the resulting impact on sales as well as the cost implications across the value chain. When the analysis shows the costs beginning to overwhelm the added revenues, you've found your innovation fulcrum. By deconstructing their companies to a zero-complexity baseline, managers can break through organizational resistance and deeply entrenched ways of thinking to find the right balance between innovation and complexity.     

Adjustment costs of institutional tax changes from the audit pricing perspective: Empirical evidence from the VAT reform

Institutional changes inevitably impose adjustment costs on firms while also generating benefits. However, empirical evidence regarding the adjustment costs of institutional changes is limited, with much of the focus centered on benefits. Using data on China’s A-share listed companies from 2010 to 2018 and the nation’s staggered adoption of the “business tax to value-added tax reform” (hereafter, “VAT reform”) as a natural experiment, we examine the impact of this reform on a particular corporate cost: audit fees. We find audit fees to be 8.11% higher for VAT reform firms than for non-VAT reform firms. This difference does not exist before or after the reform year. That is, it is only observed in the year of VAT reform implementation. This indicates the existence of an adjustment cost specifically related to the VAT reform. Furthermore, we observe larger fee increases among firms audited by Big 4 international audit firms, firms that require more audit work, firms that are more complex, and firms with weak internal controls. From the audit pricing perspective, we provide evidence of the economic consequences of tax reform. The corporate adjustment costs that arise from institutional changes deserve more attention from decision-makers.