Cost Stickiness as a Consequence of Capital Market Signaling

38 Pages Posted: 6 Nov 2018 Last revised: 18 Dec 2018

See all articles by Eti Einhorn

Eti Einhorn

Tel Aviv University

Efrat Shust

The Department of Management and Economics, The Open University of Israel

Date Written: October 11, 2018

Abstract

Ample empirical evidence documents the tendency of costs to increase more when revenues rise than to decrease when revenues fall by an equivalent amount. The study offers a capital market oriented explanation for this asymmetric cost behavior, which is known in the literature as cost stickiness, by highlighting the informational role of managerial decisions regarding resource adjustment in response to demand shocks. The suggested explanation is established within a theoretical framework that demonstrates how capital market considerations induce managers of publicly traded firms to utilize their observable resource adjustment decisions as a signaling device through which they convey their private information to the capital market investors. Our analysis indicates that this signaling mechanism serves managers to promote the stock price of their firm at the expense of distorting the optimal cost structure of the firm in a way that triggers a cost stickiness pattern.

Keywords: cost behavior; cost stickiness; cost anti-stickiness; signaling

JEL Classification: D21; D24; D82; M41

Suggested Citation

Einhorn, Eti and Shust, Efrat, Cost Stickiness as a Consequence of Capital Market Signaling (October 11, 2018). Available at SSRN: https://ssrn.com/abstract=3264542 or http://dx.doi.org/10.2139/ssrn.3264542

Eti Einhorn (Contact Author)

Tel Aviv University ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel

Efrat Shust

The Department of Management and Economics, The Open University of Israel ( email )

Israel

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