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

49 Pages Posted: 27 Jul 2016 Last revised: 9 Mar 2019

See all articles by Sven Hartlieb

Sven Hartlieb

University of Bamberg

Thomas R. Loy

University of Bremen

Date Written: March 7, 2019

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

Suggested Citation

Hartlieb, Sven and Loy, Thomas R., Evidence on the Trade-Off between Cost Stickiness and Income Smoothing (March 7, 2019). 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 Bremen ( email )

Universitaetsallee GW I
Bremen, D-28334
Germany

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