The Effects Of Earnings Managment On Cost Stickiness

Cost stickiness refers to the asymmetric behavior in the sense that costs appear to increase more with an activity increase than they decrease with an activity decrease (Noreen and Soderstrom,1997; Anderson et al.,2003). This theory challenged the traditional cost models, which assume that variable costs change proportionally and symmetrically with changes in the activity driver, and the marginal changes of costs has nothing to do with the direction of the changes in the activity. With the advance of the economy, economical development becomes increasingly complex, the simple and idealized cost models can no longer explain the rules of the costs changes in companies. However, the traditional cost models has become the basic theory in the management accounting field and being wildly used in economics as well as management fields. As a result, researches about cost stickiness are of great value, compelling us to change our traditional ideas about costs behavior, reviewing some of the classic theories in management accounting and economics fields, knowing the rule of changes of expenses again.As a major part of the business management, cost and expenses management naturally gains managers’concern. The existence of cost stickiness means that cost is not only affected by the change activity, but the direction of the change. Systematic and thorough research about cost stickiness can better express how costs change in companies, how cost stickiness happen and show its features as well as economic results. Hence, understanding cost stickiness can improve the scientificalness and effectiveness of managers’decisions. Apart form that, though researching how managers’incentives affect cost stickiness, security analysts, stock holders and other investors can better understanding how managers think when they make decisions, consequently analyzing companies’cost changes and accounting information more accurate, forecasting earnings and estimating company values more rationally.Anderson et al.(2003) first put forward the conception of cost stickiness, arousing scholars’interests on this problem. However, the study about cost stickiness haven’t been formed a systematic theory system. There still is a big space between the internal and foreign research about this topic, whether form the amount of literature or from the scope and depth of the research. Factors affect cost stickiness, there are three main opinions among foreign scholars:the cost of resource adjustment, manager’s optimistic expectation and the agency problem. Most of them thought that managers opportunism factors are of great impact on cost stickiness, and carried out study from different aspects. Many domestic researchers held the same ideas, but haven’t gain huge research achievements. Therefore, this paper tries to deeply research the influence of agency problem on cost stickiness from the aspect of earnings management. We find that managers’ earnings management incentives can strongly increase the degree of cost stickiness, at the same time, it also can weaken it even result in no cost stickiness or anti-cost stickiness, depending on the aims of earnings management.This paper uses both normative research and empirical research, first systematically review cost stickiness literature, then analyze and deduce the hypothesis based on it. and goes further on these hypothesis.Through research the data form all listed companies inland between2007-2011, we find that:(1) Chinese listed companies’ selling expenses and administrative expenses exhibit stickiness, they increase0.423%with an activity increase1%, while they only decrease0.236%with an activity decrease the same degree. However, the cost stickiness has decreased significantly compared with the level in the year of2000.(2) Different earnings management incentives have different effect on cost stickiness." big bath " incentive improve the level of cost stickiness in listed companies, but the turn round, finance, avoid loss and maintain profit incentives significantly decrease the level of cost stickiness.(3) The direction of managers’earnings management has strong effect on cost stickiness. When managers want to increase profit through earnings management, the level of cost stickiness would be decrease. On the contrary, if they want to lower the earnings, the cost would become sticker.(4) Theoretically, there is more room for administrative expense to be manipulated, so its stickiness would be more flexible. In fact, most managers are self-interested, so when they have to cut down expenses, they tend to choose selling expenses which contribute little to their own interest. As a result, administrative expenses are stickier than selling expenses. Apart form that, this paper analyze the relationship between the real and accrual based earnings management from the aspect of cost stickiness. Our research show that they are not treated as substitutes, managers use them flexibly to achieve earnings goals.The main contribution of this paper fist deeply research how managers’ opportunism affect cost stickiness in listed companies from the aspect of earnings management, consequently demonstrate agency problem’s strong influence on cost behavior. Meanwhile, analyzing companies’financial information from the aspect of cost stickiness provide more reference for stock holders and potential investors in forecasting earnings and estimating company values.