The Effect of Sales Downside Risk on Cost Stickiness
DOI:
https://doi.org/10.48047/bapa4c05Keywords:
Cost stickiness, Sales downside risk, Sales total risk, Earnings downside risk, Earnings total risk, Managerial abilityAbstract
Understanding the behavior of cost is essential in managing the company. This paper is
about managers’ cost decisions under uncertainty, specifically whether managers
understand risk on sales and incorporate such risk into cost decisions. Following method of
calculating earnings downside risk, I constructed a sales expectation model and measured
sales downside risk, and evaluated how managers react to sales downside risk. I find that:
(1) under sales downside risk, managers have cost structure with lower fixed costs and
higher variable costs, resulting in less sticky cost behavior; (2) under sales overall risk,
managers have cost structure with higher fixed costs and lower variable cost, resulting in
more sticky cost behavior; (3) managers care more about risk on sales than risk on earnings
when they make cost decisions; and (4) high-ability managers better understand such risks
than low-ability managers.
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