Cost stickiness around the financial crisis – empirical evidence from the field of electronic equipment

Abstract

Over the past decade, there has been an increasing amount of discussion on the topic of short-run asymmetric cost response to activity changes. This kind of cost behaviour has been labelled as cost stickiness in the accounting literature. The model of cost stickiness suggests that the direction of the change in cost driver influences the magnitude of the change in the sense that cost are found to increase more than they decrease from an equivalent activity rise and fall. This is what differentiates the model from the traditional textbook cost model, which argues that cost changes follow linearly and proportionally the changes in the cost driver.

Prior literature successfully finds cost stickiness in cross sectional samples and different individual factors that influence its existence. This study contributes to the literature by considering whether the existence and the degree of cost stickiness is conditional to external circumstances in a field specific sample. The purpose is to evaluate the influence of economic downturn to the existence and degree variation of cost stickiness. The focus is on degree variations before and after the financial crisis of 2008 in the field of electronic equipment.

This study is conducted through an empirical model that evaluates selling, general and administrative cost changes relative to contemporaneous sales revenue changes. The data sample consist of US listed companies in the field of electronic equipment during 2001-2015. The data is derived from Compustat database of Wharton Research Data Services.

The results of the study suggest that economic downturn influences the degree of cost stickiness but the variation is subject to the field in question. No statistically significant results are found in the degree variation of the field of electronic equipment. However, results from additionally conducted robustness test identify that the field of retail and wholesale, shows more cost stickiness after the beginning of the crisis than before it. This study strengthens the findings of prior literature and offers evidence of the influence of external factors to the degree of cost stickiness.