Managerial Overconfidence and Cost Stickiness

42 Pages Posted: 31 Jan 2013

See all articles by Clara Xiaoling Chen

Clara Xiaoling Chen

University of Illinois at Urbana-Champaign - Department of Accountancy

Timo Gores

University of Cologne

Julia Nasev

Ludwig-Maximilians-University Munich

Date Written: January 29, 2013

Abstract

We propose managerial overconfidence as a behavioral explanation for SG&A cost stickiness. Building on the psychology literature, we predict that overconfident managers are more likely to overestimate future demand and therefore less likely to cut SG&A costs when sales decline. Using a sample of 14,568 S&P 1500 firm-years between 1992 and 2011, we document that SG&A cost stickiness increases in the degree of CEO overconfidence. We address key alternative explanations and document that our results are robust to different measures of managerial overconfidence and different model specifications. By focusing on a managerial characteristic, our results provide strong support for the role of managerial discretion in cost management.

Keywords: managerial overconfidence, cost stickiness, cost behavior

JEL Classification: M4

Suggested Citation

Chen, Clara Xiaoling and Gores, Timo and Nasev, Julia, Managerial Overconfidence and Cost Stickiness (January 29, 2013). Available at SSRN: https://ssrn.com/abstract=2208622 or http://dx.doi.org/10.2139/ssrn.2208622

Clara Xiaoling Chen

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Timo Gores

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

Julia Nasev (Contact Author)

Ludwig-Maximilians-University Munich ( email )

Geschwister-Scholl-Platz 1
Munich, 80539
Germany

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