Influences of Prior Period Revenue, Perceived Psychological Costs, and Manager Agency on Labor Cost Reduction Decisions Following a Current Period Revenue Decline

41 Pages Posted: 20 Oct 2020 Last revised: 18 Dec 2020

See all articles by Valerie Chambers

Valerie Chambers

Weber State University

Gary Fleischman

Texas Tech University

Eric N. Johnson

University of Wyoming

Kenneth Zheng

University of Wyoming - Department of Accounting and Finance

Date Written: September 1, 2020

Abstract

This experimental study investigates whether prior period sales declines, the psychological costs of layoffs, and manager psychological agency (self-focus) influences managers’ decisions to cut labor costs in a “sticky cost” context. Using 149 experienced managers recruited through CloudResearch as participants, we manipulate prior period sales changes (increase versus decrease) and perceived psychological costs of employee layoffs (higher in a “family” culture; lower in a “distant” culture) to investigate managers’ labor downsizing choices in the face of pressure to maintain income due to a current period sales decline. We also measure manager agency to examine its influence on labor cost reduction decisions.

Findings suggest that managers are more likely to lay off employees when facing successive sales decreases, and less likely to do so when psychological costs are high and prior year sales increased. In addition, we find that managers higher in agency are more likely to cut employees in order to achieve a short-term bonus. However, when given the choice to reduce labor costs using pay cuts or layoffs, more-agentic managers favor pay cuts over layoffs, thus retaining labor resources (consistent with empire building). We discuss the implications of our results for practice and future research into asymmetric cost behavior.


Keywords: Sticky costs, bonus compensation, manager agency, strategic advantage

JEL Classification: M41

Suggested Citation

Chambers, Valerie and Fleischman, Gary and Johnson, Eric N. and Zheng, Kenneth, Influences of Prior Period Revenue, Perceived Psychological Costs, and Manager Agency on Labor Cost Reduction Decisions Following a Current Period Revenue Decline (September 1, 2020). Available at SSRN: https://ssrn.com/abstract=3684896 or http://dx.doi.org/10.2139/ssrn.3684896

Valerie Chambers

Weber State University ( email )

3802 University Circle
Ogden, UT 84408
United States

Gary Fleischman

Texas Tech University ( email )

2500 Broadway
Lubbock, TX 79409
United States

Eric N. Johnson (Contact Author)

University of Wyoming ( email )

Department of Accounting and Finance
College of Business
Laramie, WY 82071
United States

HOME PAGE: http://www.uwyo.edu/accounting/accounting-faculty-and-staff-directory/Eric%20Johnson.html

Kenneth Zheng

University of Wyoming - Department of Accounting and Finance ( email )

Dept. 3275
1000 E. University Ave
Laramie, WY 82071-2000
United States

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