The Moderating Effect of Prior Sales Changes on Asymmetric Cost Behavior
36 Pages Posted: 17 May 2006 Last revised: 23 Jul 2015
Date Written: January 9, 2014
Recent research documents the empirical phenomenon of “sticky costs” and attributes it to a theory of deliberate managerial decisions in the presence of adjustment costs. We refine this theoretical explanation and show that it gives rise to a more complex pattern of asymmetric cost behavior that combines two opposing processes: cost stickiness conditional on a prior sales increase and cost anti-stickiness conditional on a prior sales decrease. These predictions reflect the structure of optimal decisions with adjustment costs and the impact of prior sales changes on managers’ expectations about future sales changes. Empirical estimates for Compustat data support our hypotheses. We further verify our predictions using additional proxies for managers’ expectations, and show that our model offers important new insights.
Keywords: optimism, pessimism, cost stickiness, anti-stickiness, cost behavior
JEL Classification: D24, M41
Suggested Citation: Suggested Citation