Do Earnings Targets and Managerial Incentives Affect Sticky Costs?

Journal of Accounting Research, Forthcoming

45 Pages Posted: 19 Sep 2012

See all articles by Itay Kama

Itay Kama

University of Michigan, Stephen M. Ross School of Business

Dan Weiss

Tel Aviv University - Coller School of Management

Date Written: September 19, 2012

Abstract

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.

Keywords: sticky costs, cost structures, earnings targets, managerial incentives, adjustment costs

JEL Classification: G12, M41

Suggested Citation

Kama, Itay and Weiss, Dan, Do Earnings Targets and Managerial Incentives Affect Sticky Costs? (September 19, 2012). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2148888

Itay Kama (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-4538 (Phone)

Dan Weiss

Tel Aviv University - Coller School of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel

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