Managerial Ability and Cost Behavior

Since Anderson et al. (2003) developed the notion of sticky cost to reflect the manager’s deliberate resource commitment decisions. Prior studies in the management accounting literature have been generally focusing on circumstances that facilitate the asymmetric cost pattern such as corporate strategy, capacity utilization, corporate governance, managerial optimism, and so on. In contrast, this study investigates the implication of managers’ judgmental capability on the cost behavior directly addressing the original motivation in Anderson et al. (2003). We associate managerial ability with the degree of cost stickiness and evaluate whether able managers have good estimation about firm’s future demand. In the organization theory, slack resource is described as a mechanism to absorb environmental variation and introduce innovation, and hence, slack is necessary to help ensure the long-run survival of the firm (Cyert and March, 1963; Thompson, 1967). According to prior studies in the organization theory, we expect that able managers would make a better use of (forward-looking productive) slack for strategic purposes, which results in cost stickiness when demand activities go slow. To quantify managerial ability, we use the managerial ability measure developed by Demerjian et al. (2012). We find that (1) the degree of SG&A costs stickiness is positively associated with managerial ability, and (2) this result is more prevalent when environmental volatility is larger or when the firm is at a growing stage. An important message of our findings is that more able and knowledgeable managers understand circumstances where slack resources are necessary for uncertainty or future growth and hence can make a wise use of the slack resources, resulting in stronger sticky cost patterns.