The Moderating Effect of Prior Sales Changes on Asymmetric Cost Behavior

2014 ◽  
Vol 26 (2) ◽  
pp. 221-242 ◽  
Author(s):  
Rajiv D. Banker ◽  
Dmitri Byzalov ◽  
Mustafa Ciftci ◽  
Raj Mashruwala
Keyword(s):  
Adjustment Costs ◽  
Theoretical Explanation ◽  
Managerial Decisions ◽  
Empirical Estimates ◽  
Cost Behavior ◽  
Asymmetric Cost ◽  
The Impact ◽  
Cost Stickiness ◽  
Asymmetric Cost Behavior ◽  
Sales Increase

ABSTRACT Recent research documents the empirical phenomenon of “sticky costs” and attributes it to a theory of deliberate managerial decisions in the presence of adjustment costs. We refine this theoretical explanation and show that it gives rise to a more complex pattern of asymmetric cost behavior that combines two opposing processes: cost stickiness conditional on a prior sales increase, and cost anti-stickiness conditional on a prior sales decrease. These predictions reflect the structure of optimal decisions with adjustment costs and the impact of prior sales changes on managers' expectations about future sales changes. Empirical estimates for Compustat data support our hypotheses. We further verify our predictions using additional proxies for managers' expectations, and show that our model offers important new insights. JEL Classifications: D24; M41.

The Magnitude of Sales Change and Asymmetric Cost Behavior

2018 ◽  
Vol 31 (3) ◽  
pp. 65-81 ◽  
Author(s):  
Mustafa Ciftci ◽  
Taisier A. Zoubi
Keyword(s):  
Small Current ◽  
Slack Resources ◽  
Large Current ◽  
Cost Behavior ◽  
Asymmetric Cost ◽  
The Impact ◽  
Cost Stickiness ◽  
Asymmetric Cost Behavior ◽  
Sales Increase ◽  
Jel Classifications

ABSTRACT We investigate the impact of the magnitude of current sales changes on asymmetric cost behavior. We expect that managers are likely to consider small (large) current sales decreases as temporary (permanent). Therefore, they will be less (more) likely to cut costs for small (large) current sales decreases. Accordingly, we predict and find that, conditional on a prior sales increase, cost stickiness is greater for small current sales changes than for large current sales changes. In addition, prior research suggests that, conditional on a prior sales decrease, slack resources retained from the prior period might lead to cost anti-stickiness. We expect that slack resources retained from the prior period will have a greater (smaller) impact on cost behavior for small (large) current sales changes. Accordingly, we predict and find that, conditional on a prior sales decrease, cost anti-stickiness is greater for small current sales changes than for large current sales changes. JEL Classifications: M41; M46; G12.

Managers' Equity Incentives and Asymmetric Cost Behavior

2021 ◽  
Author(s):  
Eric R. Brisker ◽  
Jong Chool Park ◽  
Hakjoon Song
Keyword(s):  
Stock Price ◽  
Adjustment Costs ◽  
Activity Levels ◽  
Managerial Decision ◽  
Stock Volatility ◽  
Equity Incentives ◽  
Cost Behavior ◽  
Asymmetric Cost ◽  
Asymmetric Cost Behavior ◽  
Sales Increase

Recent research documents the phenomenon of asymmetric cost behavior where the cost structure of the firm changes differently in response to an increase in sales than to a decrease in sales and attributes this behavior to deliberate decisions made by managers that face adjustment costs. In this paper, we test the relationship between asymmetric cost behavior and equity incentives that are known to impact managerial decision making. We find that a measure of the sensitivity of managerial wealth to stock price (delta) is positively related to sticky costs where costs increase more quickly in response to a sales increase than they decline in response to a sales decrease. Conversely, we find that a measure of the sensitivity of managerial wealth to stock volatility (vega) is positively related to anti-sticky costs where costs increase to a lesser extent in response to a sales increase than they decline in response to a sales decrease. These results indicate the importance that equity incentives have on managerial resource adjustment decisions in response to changes in firm activity levels.

Asymmetric Cost Behavior

2014 ◽  
Vol 26 (2) ◽  
pp. 43-79 ◽  
Author(s):  
Rajiv D. Banker ◽  
Dmitri Byzalov
Keyword(s):  
Empirical Evidence ◽  
Adjustment Costs ◽  
Financial Accounting ◽  
Alternative View ◽  
Behavior Model ◽  
Managerial Decisions ◽  
Cost Behavior ◽  
Resource Adjustment ◽  
Asymmetric Cost ◽  
Asymmetric Cost Behavior

ABSTRACT We synthesize the growing literature on asymmetric cost behavior—a new way of thinking about costs and, by extension, earnings. While the traditional cost behavior model describes a mechanistic relation between activity and costs, this alternative view recognizes the primitives of cost behavior—resource adjustment costs and managerial decisions. These primitives give rise to “sticky” and “anti-sticky” costs, along with traditional “fixed” and “variable” costs as extreme cases. We formulate an integrated framework of asymmetric cost behavior and review the empirical evidence in support of this framework and its implications for both cost and financial accounting research. We clarify empirical issues and show that recent contrary claims about the validity of findings in the literature are unwarranted because of econometric errors. We present new comprehensive evidence from Global Compustat, which demonstrates that asymmetric cost behavior is a pervasive global phenomenon. We also discuss research opportunities.

scholarly journals Financial Risk and Cost Stickiness: Evidence From Egypt

2021 ◽  
Vol 11 (2) ◽  
pp. 46
Author(s):  
Mohamed Mandour
Keyword(s):  
Financial Risk ◽  
Manufacturing Firms ◽  
Annual Reports ◽  
Cost Behavior ◽  
Asymmetric Cost ◽  
Score Model ◽  
The Cost ◽  
The Impact ◽  
Cost Stickiness ◽  
Sales Increase

This study seeks to investigate whether the cost of goods sold (COGS) behaves asymmetric to change in sales, and examines the effect of financial risk on asymmetric cost behavior of COGS in the Egyptian manufacturing firms. The financial data of this study were collected from the published annual reports for a sample of 65 Egyptian listed manufacturing firms during the period (2006-2015) with total observations 530 firm-year. The analysis of this paper is based on Anderson et al.’s (2003) cost stickiness model. The findings indicate that the COGS is sticky to change in sales, it rises more when sales increase than when it falls for equivalent sales decrease and the degree of cost stickiness increases with a firm’s financial risk. This study is the first attempt to examine the direct effect of financial risk on the COGS behavior using Altman Z-score model as a proxy for financial risk, which may affect the accuracy of the results. By focusing on this proxy, the study identifies a significant relationship, which was not adequately addressed in previous studies. Therefore, this study extends the cost behavior literature by examining the impact of financial risk on managers' decisions to amend the resources.

scholarly journals Sticky cost behavior: evidence from Egypt

2017 ◽  
Vol 7 (1) ◽  
pp. 16-34 ◽  
Author(s):  
Awad Elsayed Awad Ibrahim ◽  
Amr Nazieh Ezat
Keyword(s):  
Corporate Governance ◽  
Information Needs ◽  
Academic Research ◽  
Content Type ◽  
Listed Firms ◽  
Corporate Governance Code ◽  
Cost Behavior ◽  
Asymmetric Cost ◽  
Cost Stickiness ◽  
Asymmetric Cost Behavior

Purpose The purpose of this paper is to provide further empirical evidence on the asymmetric cost behavior, cost stickiness, in an emerging country, Egypt, which lacks academic research on this subject. Design/methodology/approach This study uses multiple regression analysis to analyze the behavior of selling, general, and administrative costs (SG&A) and cost of goods sold (CGS) individually and jointly using total costs (TC) for the period 2004-2011 for Egyptian-listed firms. In addition, the study compares the cost behavior three years prior to and after the application of the corporate governance code in Egypt in 2007. Findings The results indicate that asymmetric cost behavior is common among Egyptian-listed firms as their SG&A, CGS, and TC were found to be sticky during the study period. The application of the corporate governance code in Egypt was found to affect the nature of SG&A – the behavior of these costs changed from sticky before the code to anti-sticky after the application of the code. Moreover, the code was found to affect the magnitude of stickiness of both CGS and TC. Originality/value Greater awareness about cost behavior is important for emerging markets such as Egypt in order to protect investors’ interests and satisfy their information needs. To the best of our knowledge, this study is the first to provide evidence on cost stickiness in Egypt. Moreover, this study provides further evidence on the correlation between corporate governance and asymmetric cost behavior.

Discussion of Asymmetric Cost Behavior—Sticky Costs: Expenses versus Cash Flows

2014 ◽  
Vol 26 (2) ◽  
pp. 81-90 ◽  
Author(s):  
Efrat Shust ◽  
Dan Weiss
Keyword(s):  
Cash Flows ◽  
Economic Costs ◽  
Comprehensive Review ◽  
Cost Behavior ◽  
Asymmetric Cost ◽  
Asymmetric Costs ◽  
The Asymmetry ◽  
Cost Stickiness ◽  
Asymmetric Cost Behavior

ABSTRACT This note highlights a subtle aspect of the asymmetric costs literature not covered in the comprehensive review by Banker and Byzalov (2014). Specifically, we test the assertion underlying this literature that reported expenses can serve as an appropriate proxy for estimating the asymmetry of economic costs. Our findings refute this assertion, indicating that reporting choices influence the estimated asymmetry level of reported expenses. As a result, reported expenses are significantly more asymmetric (sticky) than economic costs. This evidence suggests that reporting choices required by GAAP matter in estimating cost stickiness. These findings enrich Banker and Byzalov (2014) by suggesting that future asymmetric costs research should (1) look for alternative accounting variables with the potential to capture economic costs, and (2) explore how various types of reporting choices affect asymmetric cost behavior.

scholarly journals Asymmetric Cost Behavior and Investment in R&D: Evidence from China’s Manufacturing Listed Companies

2019 ◽  
Vol 11 (6) ◽  
pp. 1785 ◽  
Author(s):  
Renji Sun ◽  
Kung-Cheng Ho ◽  
Yan Gu ◽  
Chang-Chih Chen
Keyword(s):  
Economic Consequences ◽  
Cost Behavior ◽  
Failure Cost ◽  
Asymmetric Cost ◽  
The Mean ◽  
Using Data ◽  
D Investment ◽  
Cost Stickiness ◽  
Asymmetric Cost Behavior ◽  
Total Sales

Asymmetric cost behavior or stickiness has drawn attention in recent years. Although studies have focused on the causes of and factors contributing to cost stickiness, few have investigated its economic consequences. This paper empirically examines how firms’ asymmetric behavior influences their research and development (R&D) investment. Because cost stickiness increases innovation failure cost, we expect cost stickiness to reduce R&D expenditure. By using data from Chinese listed manufacturing firms between 2007 and 2015, we empirically test and confirm this hypothesis. On average, with one standard deviation added to the mean, R&D expenditure over total asset and that over total sales are reduced by 2.7% and 2.2%, respectively. Furthermore, the dampening effect of cost stickiness on R&D investment becomes more prominent with increasing risks faced by firms. Only SG&A cost stickiness exerts a dampening effect on R&D, whereas cost of goods sold (COGS) and total cost stickiness demonstrate no significant effects.

Cost Behavior and Analysts’ Earnings Forecasts

2010 ◽  
Vol 85 (4) ◽  
pp. 1441-1471 ◽  
Author(s):  
Dan Weiss
Keyword(s):  
Management Accounting ◽  
Earnings Forecasts ◽  
Research Topic ◽  
Financial Accounting ◽  
Market Response ◽  
Earnings Surprises ◽  
Cost Behavior ◽  
Asymmetric Cost ◽  
Cost Stickiness ◽  
Asymmetric Cost Behavior

ABSTRACT: This study examines how firms’ asymmetric cost behavior influences analysts’ earnings forecasts, primarily the accuracy of analysts’ consensus earnings forecasts. Results indicate that firms with stickier cost behavior have less accurate analysts’ earnings forecasts than firms with less sticky cost behavior. Furthermore, findings show that cost stickiness influences analysts’ coverage priorities and investors appear to consider sticky cost behavior in forming their beliefs about the value of firms. This study integrates a typical management accounting research topic, cost behavior, with three standard financial accounting topics (namely, accuracy of analysts’ earnings forecasts, analysts’ coverage, and market response to earnings surprises).

scholarly journals Co-CEOs and Asymmetric Cost Behavior

2019 ◽  
Vol 11 (4) ◽  
pp. 1046 ◽  
Author(s):  
Jiyeon Lee ◽  
Jin-Ha Park ◽  
Jiwon Hyeon
Keyword(s):  
Corporate Governance ◽  
Foreign Ownership ◽  
Governance Mechanism ◽  
Governance Mechanisms ◽  
Cost Behavior ◽  
Corporate Governance Mechanism ◽  
Asymmetric Cost ◽  
External Governance ◽  
Cost Stickiness ◽  
Asymmetric Cost Behavior

This study investigates the effect of co-CEO structure on asymmetric cost behavior. A firm’s cost behavior reflects managers’ decision making about resources, which can be influenced by various factors. One of them relates to a manager’s decision to inefficiently reallocate their company’s resources when sales decline in pursuit of their incentives for empire-building and disincentives for downsizing. These inefficient resource allocations may result in asymmetric cost behavior, and ultimately be harmful to a firm’s sustainability. We consider the co-CEO structure as an alternative corporate governance mechanism that prevents managers from making inappropriate decisions. By doing so, we investigate whether the degree of cost stickiness differs between co-CEO and single-CEO structures, and whether the former complements external governance mechanisms, particularly foreign ownership, in mitigating cost stickiness. We analyze data from Korean listed companies for 2000–2013, and find that the cost stickiness is lower in the co-CEO structure than in the single-CEO structure. Thus, the co-CEO structure works as an alternative corporate governance mechanism to control the agency problem by inducing mutual monitoring among co-CEOs. Furthermore, the reduction in cost stickiness is greater for firms with higher foreign ownership, indicating that the co-CEO structure complements external governance mechanisms.

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