Business Strategy, State-Owned Equity and Cost Stickiness: Evidence from Chinese Firms

Abstract

This paper investigates the relationship between business strategy and cost stickiness under different ownership. Using the data from listed firms in China from 2002 to 2015, we find that first, firms with different strategies exhibit different cost behavior. The cost stickiness of choosing a differentiation strategy is higher than that of choosing a low-cost strategy. Second, management expectations will affect cost stickiness. Optimistic expectations will increase cost stickiness, while pessimistic expectations will reduce cost stickiness. Third, management expectations can adjust the relationship between business strategy and cost stickiness in terms of government-created advantages (GCAs). If management expectations tend to be optimistic, the cost stickiness is higher with a differentiation strategy than with a low-cost strategy. If management expectations tend to be pessimistic, then cost stickiness is higher with a low-cost strategy than with a differentiation strategy. Finally, the state-owned equity affects the extent of the effect of a differentiation strategy on cost stickiness. State-owned firms, which receive more GCAs than non-state-owned firms, have stronger cost stickiness than non-state-owned firms, even if both categories of firms use more differentiation strategy.

Product market competition and cost stickiness: Evidence from China

“…In the face of the increase of product market competition, the management does not actively reduce the redundant cost, and there is the problem of soft budget constraint (Lin & Li, 2008, Lin & Tan, 1999 (Naughton, 2017;Zheng et al, 1998). In model 2, the coefficient of cost stickiness of differentiated strategic enterprises is 0.063% and 0.070% higher than that of cost-leading strategic enterprises respectively, which shows that in the Chinese cost-oriented industrial environment, the cost stickiness of enterprises implementing differentiated strategy is higher than that of enterprises implementing cost-leading strategy (Zhong et al, 2020). The coefficient of…”

“…Anderson et al (2003) first put forward the concept of cost stickiness, and confirmed the existence of cost stickiness in American listed companies based on the empirical research. Cost stickiness is also a pervasive phenomenon in China (Xu & Sim, 2017; Zhong et al, 2020).…”

“…It is also an important supplement to different aspects of the company's operational efficiency and risk. A large number of literatures study the influencing factors of cost stickiness (Holzhacker et al, 2015; Li & Zheng, 2017; Zhong et al, 2020), among which the relationship between internal or external governance mechanism and Cost Stickiness has important research value.…”

“…(2) Competitive strategy affects the decision‐making of resource allocation and cost adjustment. Zhong et al (2020) argue that cost stickiness of enterprises with differentiation strategy is higher than that of enterprises with cost leadership strategy in China. Product market competition is closely related to competitive strategy.…”

“…Due to Chinese unique enterprise system, the cost management behavior of state‐owned enterprises has different characteristics. Zhong et al (2020) argue that State‐owned firms have different cost stickiness with non‐state‐owned firms. This paper discusses the influence of property right as a moderator variable on the relationship between product market competition and cost stickiness.…”