Internal Governance and Cost Stickiness

Abstract

ABSTRACT Internal governance is the bottom-up governance mechanism within the top management team (hereinafter referred to as “TMT”) through which key subordinates internally monitor the Chief Executive Officer (CEO). We find that cost stickiness is negatively associated with internal governance after controlling for legitimate economic reasons of cost stickiness, suggesting that internal governance mitigates agency-based cost stickiness. Consistent with the agency explanation, the results show that the impact of internal governance on cost stickiness is stronger for firms with lower future-value creation of selling, general, and administrative (SG&A) costs. In addition, we document that the impact of internal governance on cost stickiness is more pronounced for firms with more-effective board monitoring. This paper extends a growing literature that investigates the impact of internal governance on corporate decisions and complements existing studies on the role of various governance mechanisms in mitigating agency-based cost stickiness. JEL Classifications: M41; G30.

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