Managers' Equity Incentives and Asymmetric Cost Behavior

Abstract

Recent research documents the phenomenon of sticky cost behavior where costs change asymmetrically between an increase and a decrease in sales and attributes this behavior to managers’ deliberate decisions. In this paper, we test the relationship between sticky cost behavior and equity incentives. We find that a measure of the sensitivity of managerial wealth to stock price (delta) is positively related to sticky costs where costs increase more quickly in response to a sales increase than they decline in response to a sales decrease. Conversely, we find that a measure of the sensitivity of managerial wealth to stock volatility (vega) is positively related to antisticky costs where costs increase to a lesser extent in response to a sales increase than they decline in response to a sales decrease. These results indicate the importance that equity incentives have on managerial resource adjustment decisions in response to changes in firm activity levels

Keywords: executive compensation; equity incentives; asymmetric cost behavior

JEL Classification: G32; G34