Stickiness in Costs and Voluntary Disclosures: Evidence from Management Earnings Forecasts

Abstract

We investigate the relationship between cost stickiness and management earnings forecasts. Prior research suggests that earnings are more volatile for sticky cost firms resulting in greater earnings forecast errors. The greater forecast errors might increase investors’ demand for information and induce managers to issue earnings forecasts. Alternatively, managers might refrain from issuing earnings forecasts for sticky cost firms because greater forecast errors might damage managers’ credibility and adversely affect their job security. We find that cost stickiness is positively associated with management earnings forecast issuance suggesting that the benefits outweigh the costs. Prior research also suggests that cost stickiness has negative implications for earnings. We find a positive association between cost stickiness and management earnings forecast errors suggesting that managers do not fully incorporate the negative implications of cost stickiness into their forecasts. Finally, we find that analysts’ forecast errors for sticky cost firms are greater than those of managers’.

Keywords: stickiness in costs; asymmetric cost behavior; management earnings forecast issuance; errors in management earnings forecasts; surprise in management forecasts

JEL Classification: M41, M46, G12