Are 'Sticky Costs' the Result of Deliberate Decision of Managers?
27 Pages Posted: 6 Aug 2009 Last revised: 17 Feb 2011
Date Written: February 1, 2011
Recent research on cost behavior has revealed that costs do not change proportionately with changes in sales, showing that costs increase in response to increases in sales, but do not decline proportionately with reductions in sales. This asymmetric cost behavior is termed as “sticky costs.” One of the hypotheses on costs stickiness explains it as a phenomenon that results from the deliberate decisions of managers. When managers are faced with a decline in sales, there are some who consider the decline to be temporary, and expect sales to rebound in the near future; thus, there are managers who, deliberately, hold onto resources during periods of declining sales. Such behavior is justified when, in the long run, retaining resources could result in lower costs, thus higher profits, than eliminating resources in response to declining sales and reacquiring them in times of increasing sales. This hypothesis, however, has not been directly examined in the previous research. Managers’ prospect of future sales has not been incorporated into analyses in any of the previous works. In this paper, we use sales forecasts issued by managers as a proxy for managers’ prospect of future sales and examine the hypothesis that costs stickiness is the results of the deliberate decision of managers by empirically testing whether the managers’ sales forecasts have an impact on costs stickiness. We find that the prospect of future sales is related to current level of costs stickiness. Our findings provide the strong evidence that costs stickiness is the results of deliberate decision of managers.
Keywords: sticky costs, cost behavior, deliberate decision, sales forecasts
JEL Classification: M46
Suggested Citation: Suggested Citation