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Do Earnings Targets and Managerial Incentives Affect Sticky Costs?


  • Accepted by Abbie Smith. The authors are grateful for constructive suggestions and helpful comments from an anonymous reviewer, Yakov Amihud, Eli Amir, Itay Ater, Rajiv Banker, Avraham Beja, Jeffrey Callen, Gavin Cassar, Mustafa Ciftci, Bart Dierynck, Surya Janakiraman, Michael Maher, Raj Mashruwala, Robert Pindyck, K. Sivaramakrishnan, Avi Wohl, participants of the American Accounting Association (AAA) Annual Meetings, and the Management Accounting Section Midyear Meeting. We gratefully acknowledge financial support from the Henry Crown Institute of Business Research in Israel. Part of this research was performed during a visit to London Business School. An earlier version of this study was titled “Do Managers’ Deliberate Decisions Induce Sticky Costs?”


This study explores motivations underlying managers’ resource adjustments. We focus on the impact of incentives to meet earnings targets on resource adjustments and the ensuing cost structures. We find that, when managers face incentives to avoid losses or earnings decreases, or to meet financial analysts’ earnings forecasts, they expedite downward adjustment of slack resources for sales decreases. These deliberate decisions lessen the degree of cost stickiness rather than induce cost stickiness. The results suggest that efforts to understand determinants of firms’ cost structures should be made in light of the managers’ motivations, particularly agency-driven incentives underlying resource adjustment decisions.