بررسی وابستگی بین چسبندگی هزینه و پیش بینی مدیریت سود
Abstract
1- Introduction
2- Literature review
3- Hypothesis development
4- Methodology
5- Results
6- Conclusion
References
Abstract
Purpose
The literature suggests that management discretion to adjust resources in response to changes in sales can create asymmetric cost behavior and management incentives to move stock prices can influence its decision to release management earnings forecasts (MEF). The purpose of this paper is to investigate the association between a firm’s degree of cost stickiness and its propensity to release MEF. The authors propose that both MEF and cost stickiness are influenced by management strategic choices and provide two possible explanations along with supportive evidence. First, when management is optimistic about future performance, it tends to increase both cost stickiness and is willing to disclose the optimistic expectations through MEF. Second, cost stickiness increases information asymmetry between management and investors, thus management tends to issue earnings forecast to mitigate the perceived information asymmetry.
Design/methodology/approach
The authors collect firm-level fundamental data from the COMPUSTAT database, and market data from the CRSP database during 2005 and 2016. The data used to measure variables related to institutional ownership and financial analysts are, respectively, obtained from the Thomson Reuters and the I/B/E/S databases. The quarterly MEF data are from two databases. The authors obtain the data before 2012 the from Thomson First Call’s Company Issued Guidance database and manually collect the data between 2012 and 2016 from the Bloomberg database for the largest 3,000 publicly traded US companies. The measurement of cost stickiness is based on the industry-level measurement developed by Anderson et al. (2003) and the firm-level measurements developed by Weiss (2010). The authors construct two measurements, management’s propensity to issue MEF and the frequency of MEF, to capture management’s voluntary disclosure strategy.
Findings
The analyses of a sample between year 2005 and 2016, indicate that the firm-level cost stickiness is positively associated with the firm’s propensity to issue MEF and the frequency of MEF. Moreover, the authors find that the level of cost stickiness is associated with more favorable earnings news forecasted by management. Additional tests suggest that both information asymmetry and managerial optimism may explain the relationship between cost stickiness and MEF. Finally, the authors find that the association between cost stickiness and MEF behaviors is more pronounced when the resource adjustment cost is high and when the firm efficiency is high. The results are robust after using alternative measurements of cost stickiness and MEF.
Originality/value
First, this paper attempts to build a bridge between managerial accounting and financial accounting by providing evidence of managerial incentives and discretions that affect both cost structure and earnings. The authors contribute to, and complement, prior studies that primarily disentangle the complicated accounting information system by focusing on either the internal information system or the external information system. Second, the paper complements prior studies that examine cost stickiness and its determinants of asymmetric cost behavior by providing additional evidence for the value-relevance of cost stickiness strategy and its link to MEF releases in mitigating information asymmetry. Third, the findings are also relevant to current debates among policymakers, academia and practitioners regarding modernization of mandatory and voluntary disclosures through discussing the managerial incentive behind the managerial disclosure strategies as reflected in MEF releases (SEC, 2013). Fourth, the authors provide evidence regarding management’s role in influencing cost asymmetry and MEF releases, which support the theoretical argument that management discretions affect the firms’ cost structure and MEF disclosures.
Introduction
Cost management and financial reporting are two important functions and responsibilities of management. One stream of research (e.g. Anderson et al., 2003; Banker and Chen, 2006; Banker and Byzalov, 2014; Banker et al., 2016; Banker, Byzalov and Plehn-Dujowich, 2014; Banker, Byzalov, Ciftci and Mashruwala, 2014) suggests that the cost asymmetry is affected by management discretion over resource adjustment in response to changes in sales[1]. Another stream of research investigates market reactions to management earnings forecasts (MEF) releases (e.g. Pownall et al., 1993; Soffer et al., 2000; Hutton et al., 2003), analysts’ forecast revisions in response to MEF (e.g. Cotter et al., 2006), earnings manipulation through MEF (Skinner, 1994; Richardson et al., 2004) and management earnings credibility through MEF (Mercer, 2004; Cohen et al., 2018). The two streams of research suggest that management has discretion over unutilized resources when a temporary drop in sales happens and has incentives to disclose earnings information to influence stock prices. The discretion and incentives are interweaved in the day-to-day operation of a company. Thus, examining the relationship between MEF and cost stickiness is essential to understand the effect of cost structure on earnings, which, in turn, affects MEF releases and is further explained in Section 3. Motivated by prior research, our study attempts to disentangle whether internal managerial discretion over costs in the form of cost stickiness is linked to management external voluntary disclosure choice, specifically the propensity to issue MEF. Prior research (e.g. Anderson et al., 2003; Weiss, 2010; Chen et al., 2012; Banker, Byzalov, Ciftci and Mashruwala, 2014) on cost stickiness links management strategy of retaining unused capacity (leading to cost stickiness) to management’s earnings optimism. We posit that decisions on both MEF and cost stickiness are explained by management strategic choices and propose two viable explanations on the association between the degree of cost stickiness and the propensity to issue MEF. First, when management expects an ascending trend in future earnings, the optimism increases both cost stickiness and management’s willingness to reveal its expectations in earnings. Banker, Byzalov, Ciftci and Mashruwala (2014) document that management’s optimistic expectations may result in a higher level of cost stickiness and Khan et al. (2013) and Cohen et al. (2018) find that MEFs are typically optimistic.