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A contextual analysis of the impact of managerial expectations on asymmetric cost behavior

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  • Jason V. Chen

    (University of Illinois at Chicago)

  • Itay Kama

    (Tel Aviv University)

  • Reuven Lehavy

    (University of Michigan)

Abstract

We examine the effect of managerial expectations on asymmetric cost behavior in the context of resource adjustment costs and unused resource constraints. Our results show that the incremental impact of managerial expectations on cost asymmetry is the strongest when adjustment costs and unused resources are high. Conversely, when both are low, expectations have no impact on the degree of cost asymmetry. Furthermore, when the degree of unused resources is high, managerial pessimism is associated with anti-sticky cost behavior but managerial optimism reverses this relation and results in cost stickiness. Finally, we find the strongest cost stickiness under the following: a low degree of unused resources, a high magnitude of adjustment costs, and optimistic managerial expectations; by contrast, the strongest cost anti-stickiness occurs when all three drivers operate in the opposite direction. Our study suggests that additional economic determinants should be considered when assessing the impact of managerial expectations on cost behavior.

Suggested Citation

  • Jason V. Chen & Itay Kama & Reuven Lehavy, 2019. "A contextual analysis of the impact of managerial expectations on asymmetric cost behavior," Review of Accounting Studies, Springer, vol. 24(2), pages 665-693, June.
    • Handle: RePEc:spr:reaccs:v:24:y:2019:i:2:d:10.1007_s11142-019-09491-2
    DOI: 10.1007/s11142-019-09491-2
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