Do Managerial Incentives Drive Cost Behavior? Evidence about the Role of the Zero Earnings Benchmark for Labor Cost Behavior in Belgian Private Firms

The Accounting Review (July 2012)

Posted: 21 Aug 2009 Last revised: 19 Aug 2017

See all articles by Bart Dierynck

Bart Dierynck

Tilburg University

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

Annelies Renders

Maastricht University

Date Written: January 17, 2012

Abstract

This study investigates the influence of managerial incentives to meet or beat the zero earnings benchmark on labor cost behavior of private Belgian firms. We posit that relative to managers of firms reporting healthy profits, managers meeting or beating the zero earnings benchmark will increase labor costs to a smaller extent when activity increases and decrease labor costs to a larger extent when activity decreases. This should take the form of more symmetric labor cost behavior for firms that report a small profit. Our findings are consistent with this prediction. Using detailed employee data, we show that managers of firms reporting a small profit focus on firing employees who are relatively low cost to fire. To protect their reputation in the labor market, managers of other firms, particularly those reporting healthy profits, limit the numbers of dismissals and react to activity changes by changing the number of hours that employees work.

Keywords: cost asymmetry, real activities, labor costs, employee data

JEL Classification: M12, M40, M54

Suggested Citation

Dierynck, Bart and Landsman, Wayne R. and Renders, Annelies, Do Managerial Incentives Drive Cost Behavior? Evidence about the Role of the Zero Earnings Benchmark for Labor Cost Behavior in Belgian Private Firms (January 17, 2012). The Accounting Review (July 2012), Available at SSRN: https://ssrn.com/abstract=1458305 or http://dx.doi.org/10.2139/ssrn.1458305

Bart Dierynck

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3221 (Phone)
919-962-4727 (Fax)

Annelies Renders (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

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