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Understanding Cost Management: What Can We Learn from the Evidence on 'Sticky Costs'?

44 Pages Posted: 27 Mar 2007 Last revised: 10 May 2009

Shannon W. Anderson

University of California, Davis - Graduate School of Management

William N. Lanen

University of Michigan, Stephen M. Ross School of Business

Date Written: January 2007

Abstract

Anderson, Banker and Janakiraman [2003] find that the absolute change in SG&A cost associated with decreased sales activity is systematically less than that associated with increased sales activity (so-called “sticky” costs). They interpret this as evidence of overt cost management. We review theory, empirical tests, and data employed in the sticky cost literature and argue that sticky cost behavior is not sufficient to discriminate between managerial and mechanical theories of cost management. We conclude that, using the empirical specification and data of prior studies, any observed cost behavior is consistent with cost management and focus instead on whether adjustment costs that are hypothesized to influence cost management decisions are associated with sticky cost behavior. We identify problems with an incomplete theory about adjustment costs (and assumed asymmetries) as well as problems in how plausible theories relate to the empirical test and aggregate financial accounting data used in these studies.

Keywords: cost management, sticky costs, adjustment costs

JEL Classification: M41, M46, L23, L93, J30, D21

Suggested Citation

Anderson, Shannon W. and Lanen, William N., Understanding Cost Management: What Can We Learn from the Evidence on 'Sticky Costs'? (January 2007). Available at SSRN: https://ssrn.com/abstract=975135 or http://dx.doi.org/10.2139/ssrn.975135

Shannon W. Anderson

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States

William N. Lanen (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109-1234
United States
734-763-0487 (Phone)
734-936-0282 (Fax)

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