Cost Stickiness in Australia

Characteristics and Determinants

Martin Bugeja*, Meiting Lu, Yaowen Shan

*Corresponding author for this work

Research output: Contribution to journalArticle

12 Citations (Scopus)

Abstract

This study presents empirical evidence on cost stickiness using a large sample of Australian listed firms from 1990-2010. We find cost behaviour in Australian firms is sticky on average, with a lower degree of stickiness than in United States firms. Costs increase by 0.885% with a 1% increase in sales revenues, but decrease by only 0.797% for a 1% decrease in sales. The degree of cost stickiness demonstrates a 'U' shape over the period and increases after the adoption of International Financial Reporting Standards. Sticky cost behaviour, however, is not evidenced in the resources, construction and retail industries. We document evidence consistent with the argument of adjustment costs of employed resources, managerial incentives and agency costs. The degree of cost stickiness in Australia increases with a firm's asset and employee intensity, and when managers have strong incentives to avoid decreases in earnings or losses, but is less pronounced when revenues decline in the preceding period and in firms with strong governance mechanisms. Our results provide important implications for external stakeholders' understanding of firm performance.

Original languageEnglish
Pages (from-to)248-261
Number of pages14
JournalAustralian Accounting Review
Volume25
Issue number3
DOIs
Publication statusPublished - 1 Sep 2015

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