Cost Structure and Sticky Costs

ABSTRACT Beginning with Anderson, Banker, and Janakiraman (2003), a rapidly growing body of literature attributes the short-run asymmetric cost response to activity changes (i.e., sticky costs) resulting from short-run managerial choices. In this paper, we are agnostic on the theory of sticky costs. Rather, we focus on empirical tests of cost stickiness. We show that past decisions on cost structure, which determine the magnitude of costs controllable in the short-term, induce non-stationarity in the elasticity of Sales, General, and Administrative costs, affecting the interpretation of estimates from the standard specification used in the literature. We develop suggestions for how future research might control for the effects of cost structure. Empirically, we find that cost structure confounds results usually interpreted as cost stickiness reflecting short-run managerial actions. After adjusting for the effects of fixed costs, we find that the results are unstable across alternate subsamples. Our results provide evidence that long-run cost structure decisions impact our ability to detect short-term cost management decisions. JEL Classifications: M41; L42