Sticky cost behavior and its implication on accounting conservatism: a cross-country study

Abstract

Purpose This paper aims to investigate the impact of cost stickiness on conditional conservatism. Design/methodology/approach The research sample consists of listed companies from 18 countries, using stock market indices of the BRICS, MIST, North Africa, USA and EU over the period ranging from 1997 to 2015. The authors use the firm-fixed effects method in the estimation of the models. Findings The results provide evidence of the existence of cost stickiness and conditional conservatism in the international context, using the Banker et al. (2016) model. They also argue that the conditional conservatism model (Basu, 1997) is overstated because it does not control for cost stickiness. In additional analyses, the authors conclude that the association between cost stickiness and accounting conservatism changes across country groups and across industries. The authors also document that the employee intensity and free cash-flow, as cost stickiness determinants, remain significant in the model including accounting conservatism. Moreover, the findings show that sticky cost behavior distorts inferences about standard demand drivers of conservatism such as leverage and size. Originality/value The findings are interesting and provide a better understanding of cost stickiness and conditional conservatism, and the interaction between these two phenomena in the international context, across country groups and across industries. To the best of the author’s knowledge, the study is the first one including free cash flow as a proxy for agency problem in the full model combining conservatism and cost stickiness models (Banker et al., 2016).

Does Sticky Cost Behavior Affect Earnings Quality? Evidence From Egypt

“…The current research tests the effect of sticky cost behavior on earnings quality, the second and third hypotheses, by establishing the model (2) following Banker and Byzalov (2014), Balakrishnan et al (2014), Bu et al (2015), Banker et al (2016), Silva et al (2019), and Fourati et al (2020). Like Bu et al (2015), the model (2) relies on sales levels rather than changes in sales since the dependent variable is the level of scaled earnings.…”

“…As a consequence, it is necessary when estimating accounting conservatism to take cost stickiness into account in order to avoid misrepresented estimation. In the same vein, Fourati et al (2020) examined how cost stickiness affects accounting conservatism across 18 countries from 1997 to 2015. The study denoted that ignoring the impact of cost stickiness in the model of Basu (1997) distorts the estimate of accounting conservatism as the study found that accounting conservatism was overvalued by 46.55% when not controlling for cost stickiness.…”

“…Inside this stream, some studies have started to combine sticky cost behavior with financial accounting topics. A good example of these studies is the two studies carried out by Banker et al (2016) and Fourati et al (2020) to identify the effect of sticky cost behavior on accounting conservatism. One of the crucial topics in financial accounting is earnings quality.…”

“…This result is in line with the results of some of prior studies. For instance, Banker et al (2016) and Fourati et al (2020) concluded that ignoring the impact of cost stickiness in the model of Basu (1997) distorts and overvalues the estimate of accounting conservatism. Furthermore, Silva et al (2019) revealed that the model of Dechow et al (1995) should include cost stickiness to estimate discretionary accruals more precisely and thus estimating earnings management accurately.…”

Sticky Costs and Expenses are not Alike: Mexican Reality

“…When management is optimistic about future performance it tends to increase the stickiness cost. Fourati et al (2020) provided notable evidence of the existence of cost stickiness and conditional conservatism in the international context. They conclude that the association between cost stickiness and accounting conservatism changes across country groups and industries.…”