Cost Stickiness: Value Creating or Value Destroying (The Iranian Experience)

This research reviews and tests two contradicting notions in cost stickiness literature by empirical recognition of the consequences of cost stickiness. Cost stickiness is consistent with both rational resource planning and opportunistic incentives of manager to increase personal benefits arising from status and power. Although both mechanisms involve asymmetric retention of slack, some of the implications are starkly different: the former, according to the optimal resource adjustment view, represents that retaining slack resources during sale decrease are optimal responses to future expectations and contributes to firm value, whereas the latter, according to agency theory-based view, reflects wasteful overspending which can be value-destroying. This research examined a sample of 124 companies listed in Tehran Stock Exchange over the period of 2002 to 2018. The results show that SG&A cost stickiness is generally a signal of self-interested managers who may grow a firm beyond its optimal size opportunistically while COGS stickiness can be a signal of far-sighted management in the interest of the firm. The results also indicate that investors may not fully recognize the managerial expectations underlying the resource adjustment decisions and mostly perceives SG&A cost stickiness and COGS stickiness as a signal of self-interested managers who decide to maximize their personal utility rather than the interests of the firm’s shareholders.