The Effect of Sales Downside Risk on Cost Stickiness

Abstract

Understanding the behavior of cost is essential in managerial accounting. This paper is about managers cost decisions under uncertainty, specifically whether managers understand risk on sales and incorporate such risk into cost decisions. Following method of calculating earnings downside risk, I constructed a sales expectation model and measured sales downside risk, and evaluated how managers react to sales downside risk. I find that: (1) under sales downside risk, managers have cost structure with lower fixed costs and higher variable costs, resulting in less sticky cost behavior

(2) under sales overall risk, managers have cost structure with higher fixed costs and lower variable cost, resulting in more sticky cost behavior

(3) managers care more about risk on sales than risk on earnings when they make cost decisions

and (4) high-ability managers better understand such risks than low-ability managers.