Articlegreen2012

Do Earnings Targets and Managerial Incentives Affect Sticky Costs?

462 citations0/0 files storedJournal of Accounting Research

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Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting Accounting and Organizational Management

Abstract

ABSTRACT 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.

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References

1973Risk, Return, and Equilibrium: Empirical Tests 2008Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches 2005The economic implications of corporate financial reporting 2003Earnings Management through Real Activities Manipulation 1997Earnings management to avoid earnings decreases and losses 2008Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes-Oxley Periods 1998The Influence of Institutional Investors on Myopic R&D Investment Behavior 2006Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches

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