A Contextual Analysis of the Impact of Managerial Expectations on Asymmetric Cost Behavior

Review of Accounting Studies, Forthcoming

44 Pages Posted: 1 Nov 2015 Last revised: 1 Apr 2019

See all articles by Jason V. Chen

Jason V. Chen

University of Illinois at Chicago

Itay Kama

Tel Aviv University - The Leon Recanati Graduate School of Business Administration

Reuven Lehavy

University of Michigan, Stephen M. Ross School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2019

Abstract

We examine the effect of managerial expectations on asymmetric cost behavior in the context of resource adjustment costs and unused resource constraints. Our results show that the incremental impact of managerial expectations on cost asymmetry is the strongest when adjustment costs and unused resources are high. Conversely, when both are low, expectations have no impact on the degree of cost asymmetry. Furthermore, when the degree of unused resources is high, managerial pessimism is associated with anti-sticky cost behavior but managerial optimism reverses this relation and results in cost stickiness. Finally, we find the strongest cost stickiness under the following: a low degree of unused resources, a high magnitude of adjustment costs, and optimistic managerial expectations; by contrast, the strongest cost anti-stickiness occurs when all three drivers operate in the opposite direction. Our study suggests that additional economic determinants should be considered when assessing the impact of managerial expectations on cost behavior.

Keywords: cost asymmetry, cost stickiness, cost anti-stickiness, forward looking statements, managerial expectations, managerial decisions, adjustment costs, unused resources

JEL Classification: M41, D24

Suggested Citation

Chen, Jason V. and Kama, Itay and Lehavy, Reuven, A Contextual Analysis of the Impact of Managerial Expectations on Asymmetric Cost Behavior (March 1, 2019). Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2684164 or http://dx.doi.org/10.2139/ssrn.2684164

Jason V. Chen

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

Itay Kama (Contact Author)

Tel Aviv University - The Leon Recanati Graduate School of Business Administration ( email )

Israel

Reuven Lehavy

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

701 Tappan Street
Ann Arbor, MI 48109
United States
734-763-1508 (Phone)
734-936-0282 (Fax)

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