Further Evidence on the Sticky Behaviour of Costs

Abstract

Contemporary studies on cost behaviour find that costs increase more with activity increases than they decrease in response to equivalent activity decreases. This sticky cost behaviour contradicts the traditional model which assumes that costs behave symmetrically for activity increases and decreases. Using a sample of US, UK, French, and German firms, we find that operating costs are sticky in response to changes in revenues; operating costs increase, on average, by 0.97% per 1% increase in revenues, but decrease by only 0.91% per 1% decrease in revenues. However, costs of firms that are subject to code-law systems of corporate governance (France and Germany) are more sticky than costs of firms which are subject to common-law systems of corporate governance (US and UK). Firm-specific and industry characteristics also impact on levels of cost stickiness.

Keywords: cost behaviour, cost stickiness