Evidence on the Trade-Off between Cost Stickiness and Income Smoothing

53 Pages Posted: 27 Jul 2016 Last revised: 14 Oct 2018

Sven Hartlieb

University of Bamberg

Thomas R. Loy

University of Bayreuth - Business Administration

Date Written: October 8, 2018

Abstract

This study investigates the relationship between cost stickiness and income smoothing. Both arise as a result of managerial discretion. However, an asymmetrical reaction of costs to changes in activity counteracts an ambition to report smooth income. Inversely, reducing costs during periods of declining sales, in order to secure a smooth income stream, aligns costs with activity and mitigates cost stickiness. Applying both a cross-sectional and a firm-specific model of cost stickiness, we find evidence for this negative relationship. We further separate the discretionary component from our aggregate income smoothing measure and show that the negative relation is primarily driven by opportunistic managerial motives. Our results corroborate the important role that managerial discretion plays in financial accounting as well as cost behavior.

Keywords: Asymmetric Cost Behavior; Income Smoothing; Managerial Discretion; Earnings Management

JEL Classification: D22; M41; M52

Suggested Citation

Hartlieb, Sven and Loy, Thomas R., Evidence on the Trade-Off between Cost Stickiness and Income Smoothing (October 8, 2018). AAA 2017 Management Accounting Section (MAS) Meeting. Available at SSRN: https://ssrn.com/abstract=2814309 or http://dx.doi.org/10.2139/ssrn.2814309

Sven Hartlieb

University of Bamberg ( email )

Kirschaeckerstrasse 39
Bamberg, 96045
Germany

Thomas R. Loy (Contact Author)

University of Bayreuth - Business Administration ( email )

Universitätsstr. 30
Bayreuth, 95447
Germany

HOME PAGE: http://www.wp.uni-bayreuth.de

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