Research On The Effects Of Earnings Management On Cost Stickiness

Cost stickiness refers to a incomplete linear relation between the change of operating income and that of enterprises’ cost. In other words, when the operating income increases, the percentage of the rising cost will be significantly higher than the percentage of the decline cost when the revenue falls. This goes against the theory of cost behavior analysis that we have learned in management accounting, which believes that enterprise costs maintains a linear relationship with the sales revenue. The concept of cost stickiness is first proposed by American scholars: Anderson, Banker&Janakiraman(hereinafter referred to as ABJ).Through a study of listed companies in the United States, they found that 1% growth of revenue, averagely, results in 0.55% growth of costs, while when the revenue declines by 1%, it only leads to 0.35% decrease of the costs. Anderson et al’s research on cost stickiness not only provides a key to the the research of operation management behavior concerning enterprise cost, but also connects the research of management accounting and financial accounting, which attracts extensive attention among the academic circles. Scholars at home and abroad show different opinions towards the cause of cost stickiness. Foreign scholars owe it to resources adjustment costs, managers’ optimistic expectations, and agency problems, while most of the domestic scholars are in favor of explanations from the perspectives of efficiency, contract and opportunism. However, apart from the disagreement, they all show their approval to the viewpoint that management behaviors affect cost stickiness, especially those ones to manipulate the accounting surplus for the purpose of increasing profits and reducing losses.In recent years, along with the perfection of the laws and the reform of modern enterprise system, the accuracy of public financial statements in listed companies has been questioned by the public more and more frequently. People begin to find that the financial statements of certain company cannot truly reflect its operating performance. It follows that the management of earnings in listed companies has a far-reaching influence on the cost structure, which may cause the phenomenon of stickiness. Therefore, the main purpose of this study is to find out, first, whether listed companies’ management of theirs earnings has an influence on cost stickiness or not; second, if it has, whether its varied motivations would give rise to different results; third, whether different methods of earnings management would bring about a significant difference on the influence.The number of all samples in manufacturing accounts for more than half of total samples of all industries in our country, which,at the same time, play an important role in our national economy. In the context of developing manufacturing industry, China wants to shift her focus from the quantity to the quality, which has a great significance for the implementation of the 13 th 5year-plan and the realization of China Dream. So the author chooses the manufacturing listed companies as samples from the 19 industries according to the standard classification industries in 2012 by China Securities Regulatory Commission and tries to analyze the multiple influences the earning management behavior make on cost stickiness.Based on the principal-agent theory, the incomplete contract theory and efficiency theory, the author selects the financial data of manufacturing listed companies in China from 2009 to 2014 for the purpose of testifying the existence of cost stickiness and cost anti-stickiness and finding out the influences on cost stickiness made by the motivation as well as the methods of earnings management respectively. Results show that costs stickiness is quite common a phenomenon among the listed manufacturing companies, and it shows reversal signals as the extension of time. On one hand, in the aspect of surplus management motivation, motivated by the purpose of increasing profits and reducing losses, the cost stickiness would decline; motivated by “BIGBATH?”, it would be enhanced, for managers would raise the costs for surplus reserve; motivated by profit smoothing, there’s no such significant connection. On the other hand, from the perspective of the methods of earnings management, the positive accrued earnings management level and earnings stickiness are inversely correlated, whereas the level of negative cost stickiness arises as the deepening of negative accrued cost management. Besides, there’s also a negative correlation between the real earnings management and cost stickiness, which means that the high level of real earnings management would result in a decrease of cost stickiness.