CEO Overconfidence and Cost Stickiness

Abstract

Cost stickiness occurs when costs decrease less when sales fall than they increase when sales rise. Prior literature provides both economic and agency explanations of sticky costs. Our study tackles this cost behavior from a managerial behavioral perspective. We predict and find that cost stickiness is greater when firms are managed by overconfident CEOs. The results are consistent with the notion that overconfident CEOs are more likely to exhibit an optimistic bias and tend to be overly positive about their capability of restoring sales in case of declining sales. As a result, they retain excessive selling, general and administrative resources when sales drop, leading to greater cost stickiness.

Keywords: behavior biases, CEO overconfidence, cost stickiness

JEL Classification: M41