Investigating the Competing Theories of Sticky Costs: Evidence of Organizational Incentives and Managerial Incentives

 
Journal of Accounting Advances (J.A.A)
Vol. 8, No. 1, 2016, Ser. 70/3
 
 
Extended Abstract
 
Investigating the Competing Theories of Sticky Costs:
Evidence of Organizational Incentives and Managerial Incentives
 
Simin Poursasan*                Dr. Reza Hesarzadeh**
 
Introduction
       Sticky costs describes a situation in which the price is resistant to change. In other words, when the costs reduction derived from low level of activities is less than costs increase derived from high level of activities, an asymmetric behavior may be seen which is known as sticky costs. Since there are various theories of sticky costs, the present study aims to assess theories of cost adjustment delay, deliberate decisions, and managerial incentives in all listed companies on Tehran Stock Exchange. According to cost adjustment delay theory, sticky costs in a short period of time is more than medium and long periods of time, and the sticky costs decreases with the time. According to deliberate decision theory, when managers face a problem such as sales reduction, they do not change conditions since they assume this reduction temporarily. It maintains the existing resources and brings about costs reduction in the long term. If managers change the conditions and decrease resources, they have to provide those resources in the periods of sales increase and thus, extra costs are imposed on the firm. Owing to the fact that re-providing these resources is time-consuming, firms may lose their sales opportunities to supply themselves with new resources. According to managerial incentives theory, earnings targets and managerial incentives can decrease sticky costs. The purpose of this study is to evaluate the competing theories about sticky costs. Inasmuch as till now the three theories of cost adjustment delay, deliberate decision, and managerial incentives had been proposed to explain the sticky costs, this study focusing on these theories tries to choose the best one to fit in Tehran Stock Exchange.
 
Research Hypotheses
       Hypothesis 1: According to cost adjustment delay theory sticky costs, in a short period of time, is more than medium and long periods of time, and the sticky costs decreases with the time.
       Hypothesis 2: According to deliberate decision theory, if managers expect to increase sales in the future, sticky costs increases.
       Hypothesis 3: According to managerial incentives theory, earnings targets and managerial incentives can decrease sticky costs.
 
Methods
       Target population of the research consisted of listed companies on the Tehran Stock Exchange among which 817 year-companies have been selected over a period from 2006 to 2013. Selected companies should not be among banks of financial institutions (investing companies, financial intermediations, holding or leasing). They should be active during research period without any change in their fiscal year. The present study is an applied correlational one whose data has been collected through financial statements, Rahavard Novin data base. Panel data technique has been applied in order to estimate the research model. Collected data has been analyzed by Excel software, and analyzed through the application of panel regression models and R software.
 
Results
       In the first step the cost adjustment delay theory had been studied. On the basis of cost adjustment delay theory, sticky costs, in a short period of time, is more than medium and long periods of time, and the sticky costs decreases with the time. The results indicate that the severity of sticky costs in Tehran Stock Exchange listed companies in a short period of time is more than medium and long periods of time, and the sticky costs decreases with the time. Thus, first hypothesis is confirmed.
       In the second step, the deliberate decision theory was studied. According to deliberate decision theory, if managers expect to increase sales in the future, sticky costs increases. The results show that by inserting the variable of management optimism about future sales, the severity of sticky costs does not increase. Therefore, it can be stated that sticky costs in the companies accepted in Tehran Stock Exchange is not a function of deliberate decision of managers. Thus, second hypothesis is not confirmed.
        The influence of manager’s incentives on asymmetric behavior of costs in Tehran Stock Exchange has been also examined in this study. So in the third step, the managerial incentives theory is investigated. According to managerial incentives theory, earnings targets and managerial incentives can decrease sticky costs. The results suggest that managerial incentives does not have a significant effect on the decrease in sticky costs and earnings targets and managerial incentives cannot decrease sticky costs. Thus, third hypothesis is not confirmed.
 
Discussion and Conclusion
       Findings suggest that the cost adjustment delay theory compared to the theories of deliberate decision and managerial incentives can offer a better explanation for the sticky costs of accepted companies in Tehran Stock Exchange. In other words, the costs are sticky in Tehran Stock Exchange due to inconsistency of the speed of costs and sales reduction, and costs do not decrease as fast as sales reduction. This fact can be more suitably explained through the application of cost adjustment delay theory, rather than other theories such as deliberate in Tehran Stock Exchange.
 



* MSc,  Accounting, Ferdowsi University of Mashhad,
   Corresponding author: si.poursasan@stu-mail.um.ac.ir


** Assistant Professor of Accounting, Ferdowsi University of Mashhad, Hesarzadeh@um.ac.ir