AAA Spark Meeting of the Regions

Cost Stickiness, Financial Constraints and Growth Prospects

• In Event: Cost Behaviors

Abstract

We study the determinants of cost stickiness behavior, whereby firms cut selling, general and administrative (SG&A) expenses to a smaller extent when revenue declines than the extent to which they raise them when revenue rises. We propose that cost stickiness is affected by economic considerations similar to those affecting investment. It is weaker in firms that are financially constrained and greater in firms with a higher Tobin’s q, which reflects market’s growth prospects. Our empirical cross-firm evidence supports our hypotheses. We also find that during two economic crises—the burst of the dotcom bubble in 2000 and the great financial crisis of 2008—cost stickiness declined for affected firms.

Authors

• Yakov Amihud, New York University

• Tracie Frost, Hong Kong Polytechnic University

• Muktak K. Tripathi, Temple University

• Dan Weiss, Tel Aviv University