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Sticky cost behavior: Evidence from small and medium sized companies Nicola Dalla Via* RSM Erasmus University Rotterdam Paolo Perego RSM Erasmus University Rotterdam

1 February 2013

Abstract: This paper investigates whether cost stickiness occurs in small and medium sized companies using a sample of Italian non-listed and listed firms during the period 1999-2008. Our findings show that cost stickiness emerges only for the total cost of labor and not for the selling, general, and administrative (SG&A) costs, the cost of goods sold and the operating costs. Stickiness of the operating costs is only detected in the sample of listed companies. We further contribute to the literature on sticky cost behavior by discussing critical issues associated to the extant approach of empirical analysis and interpretation of sticky cost behavior.

Key words: Cost stickiness; Cost behavior; Cost asymmetry; SMEs; Italian firms JEL Classification: M41

* Corresponding author: RSM Erasmus University Department of Accounting & Control Burgemeester Oudlaan 50 3062 PA Rotterdam The Netherlands Tel.: +31 10 4081199 E-mail address: dallavia@rsm.nl

Acknowledgments: The authors would like to thank the anonymous referee and participants at the 10th Manufacturing Accounting Research Conference, Ghent, June 2010 and the European Accounting Association Annual Congress, Ljubljana, May 2012 for their helpful comments.

Electronic copy available at: http://ssrn.com/abstract=2226399

1. Introduction Over the last decade, research in management accounting has challenged the fundamental assumption that cost behavior is symmetric for activity increases and decreases. Starting from the first empirical study by Anderson et al. (2003), considerable academic interest has focused on the short-run asymmetric response to activity change or cost stickiness. Costs behave as sticky when they raise more with increases in activity volume than they fall with decreases of the same amount. Despite a rapidly growing stream of studies seeking to document cost stickiness, the evidence has generated a debate about the validity of the theoretical constructs and the generalizability of sticky cost behavior (Anderson and Lanen, 2009; Balakrishnan et al., 2011). In particular, while a more recent body of research documents several explanatory factors of stickiness at both the firm- and country-level, attention towards the size of the firm as significant determinant of cost stickiness has been largely neglected (see Cheng et al., 2012 for a notable exception). In this study we investigate whether small and medium sized companies (SMEs) exhibit cost stickiness with reference to different cost components. The paper contributes to the literature on sticky costs in three ways. First, prior research provides evidence that corporate governance (Chen et al., 2012), labor market (Banker and Chen, 2006a; Banker et al., 2012a) and cost structure (Balakrishnan et al., 2011) characteristics have an impact on cost stickiness. These factors differ by firm size, suggesting more specific analyses that link firm size to cost behavior in order to generalize the initial findings of Anderson et al. (2003) about the average presence of cost stickiness across companies. We therefore contribute to the extant debate by documenting the disparity between the level of cost stickiness of SMEs and the evidence reported in the literature with respect to large (public, mainly US) firms (see 2

Electronic copy available at: http://ssrn.com/abstract=2226399

also Bosch and Blandón, 2011; Cheng et al., 2012). Second, in addition to the selling, general, and administrative (SG&A) costs already extensively investigated by previous studies, we extend the analysis to the behavior of cost of goods sold, total labor cost and operating costs. All these types of costs, with more or less constraints, are adjustable by managers, and hence, they are influenced to a different extent by managerial behavior. In...
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