Cost Structure and Sticky Costs

TLDR

Literature attributes short‑run asymmetric cost responses to activity changes, i.e., sticky costs, driven by short‑run managerial choices. The paper empirically tests cost stickiness while remaining agnostic about its theory and offers guidance for future research to control cost‑structure effects. The study conducts empirical tests of cost stickiness. Past cost‑structure decisions induce non‑stationarity in SG&A cost elasticity, confounding typical cost‑stickiness estimates, and after adjusting for fixed costs, results are unstable across subsamples, indicating long‑run cost structure affects detection of short‑term managerial decisions. JEL classifications: M41, L42.

Abstract

ABSTRACT Beginning with Anderson, Banker, and Janakiraman (2003), a rapidly growing body of literature attributes the short-run asymmetric cost response to activity changes (i.e., sticky costs) resulting from short-run managerial choices. In this paper, we are agnostic on the theory of sticky costs. Rather, we focus on empirical tests of cost stickiness. We show that past decisions on cost structure, which determine the magnitude of costs controllable in the short-term, induce non-stationarity in the elasticity of Sales, General, and Administrative costs, affecting the interpretation of estimates from the standard specification used in the literature. We develop suggestions for how future research might control for the effects of cost structure. Empirically, we find that cost structure confounds results usually interpreted as cost stickiness reflecting short-run managerial actions. After adjusting for the effects of fixed costs, we find that the results are unstable across alternate subsamples. Our results provide evidence that long-run cost structure decisions impact our ability to detect short-term cost management decisions. JEL Classifications: M41; L42