The Effect of Real Earnings Management and Managerial Incentives on Sticky Costs

This research aims to investigate the effect of real earnings management and managerial incentives on sticky costs. Sticky costs phenomenon represents that the costs do not change in proportion to changes in sales. In other words, the percentage of the reduction in costs when sales are reducing is less than the percentage of cost increase when the sales are increasing. In accordance with the “deliberate decision” theory, costs become sticky because of the deliberate decision of managers. This study focuses on managers’ resource adjustments when sales decline. The resource adjustments motivated to meet earnings targets and the ensuing cost structures. The research include a sample of 135 companies in the Tehran Stock Exchange for a period of 10 years from 2003 to 2013. For testing the hypothesis, multiple regression models based on panel data analysis is used. The results indicate that when managers face incentive to avoid losses, they accelerate sliding adjustment of slack resources for sales decreases. These decisions diminish the degree of cost stickiness.