The Relationship Between Company Strategies and Effective Factors According to The Degree of Cost Stickiness
الموضوعات :
Zahra Hashemipour Nasri
1
(Department of Accounting, Qom Branch, Islamic Azad University, Qom, Iran)
Mojgan Safa
2
(Department of Accounting, Qom Branch, Islamic Azad University, Qom, Iran)
Fardin Mansouri
3
(Faculty of Economy,University of Sistan and Baluchestan, Zahedan,Iran)
Reza Gholami Jamkarani
4
(Department of Accounting, Qom Branch, Islamic Azad University, Qom, Iran)
الکلمات المفتاحية: investment strategy, heavy asset strategy, affiliation with business groups, company business strategies, light asset strategy,
ملخص المقالة :
Cost stickiness is an essential subject in accounting and economics studies affected by several factors. Profit management improves how profits are presented as desired, given the importance of the company's profit for the users of financial statements. This study aimed to evaluate the strategies of heavy and light assets, company business, affiliation with business groups, investment, cost-oriented, abundance of debt, revaluation, labor adjustment, tax avoidance, and family ownership on the stickiness of the costs of companies accepted in the capital market of Iran. First, the variables and factors influencing the level of the stickiness of companies' costs were identified using expert interviews and Lawshe's index, and then the identified variables were measured. Finally, 102 companies from Iran's capital market were selected to perform statistical tests. The hypotheses testing during the six years period from 2015 to 2020 indicated that the studied strategies affected the stickiness of companies' costs.
The Relationship between Company Strategies and Effective Factors According to the Degree of Cost Stickiness
Abstract
Cost stickiness is an essential subject in accounting and economics studies affected by several factors. Profit management improves how profits are presented as desired, given the importance of the company's profit for the users of financial statements. This study aimed to evaluate the strategies of heavy and light assets, company business, and affiliation with business groups, investment, cost-oriented, abundance of debt, revaluation, labor adjustment, tax avoidance, and family ownership on the stickiness of the costs of companies accepted in the capital market of Iran. First, the variables and factors influencing the level of the stickiness of companies' costs were identified using expert interviews and Lawshe's index, and then the identified variables were measured. Finally, 102 companies from Iran's capital market were selected to perform statistical tests. The hypotheses testing during the six years period from 2015 to 2020 indicated that the studied strategies affected the stickiness of companies' costs.
Keywords: heavy asset strategy, light asset strategy, company business strategies, affiliation with business groups, investment strategy, cost-oriented strategy, abundance of debt, asset revaluation strategy, workforce adjustment, tax avoidance, family ownership, cost stickiness of companies.
1. Introduction
Awareness of the behavior of costs to changes in the activity level and sales is important information for managers to make decisions regarding planning and budgeting, pricing products, determining the break-even point, and other management issues. Variable costs increase or decrease proportionally to changes in activity volume in traditional models of cost behavior in management accounting. The magnitude of changes in costs is only dependent on the magnitude of changes in the volume of activity, and the direction of changes (increase or decrease) in the volume of activity has no effect on the magnitude of changes in costs (Chune et al., 2019).
Cost stickiness recently indicates that the increase in costs when increasing the activity level more than the decrease in costs when decreasing the volume of activity. Cost stickiness is a characteristic of the behavior of costs when the activity level changes, indicating that the magnitude of the increase in costs when the activity level increases is greater than the magnitude of the decrease of costs when the activity level decreases. Chen (2012) investigated the effect of managers' choice on cost labeling resources by labor adjustment. Anderson et al. (2003) evaluated the cost stickiness and stated that the costs are sticky when the sales decrease by the same amount as the increase in activity and the costs decrease to a smaller amount. Etily Wedon (2012) studies the effect of labor adjustment on cost stickiness with the objective of profitability. When sales decline, some resources remain unused unless managers make deliberate decisions for elimination. According to this study, managers wait to eliminate unused resources when they expect sales declines to be temporary. Karen et al. (2016) found that profit-seeking managers consider their interests during labor adjustment and overlook the firm value. Edgar et al. (2016) expressed that when these incentives are coupled with the goal of profitability, profit-seeking managers tend to eliminate unused resources even in the face of temporary sales declines. These incentives are coupled with the goal of profitability, profit-seeking managers tend to eliminate unused resources even in the face of temporary sales declines. Therefore, incentives with the purpose of profitability probably reduce the degree of cost stickiness according to the concept of cost stickiness (Anderson et al., 2003). Therefore, this study examined the relationship between the company's strategies and their effective factors with the cost stickiness level. This study continued with the outline of the theoretical foundations and research background, as well as the explanation of the research method and hypotheses, and then the results of the hypothesis test were explained, and finally, the conclusions and suggestions were expressed.
2. Theoretical foundations and research background
Previous studies regarding cost stickiness have not investigated the effect of the company's strategies and their effecting factors. Balakrishnan et al. (2004), Kama and Weiss (2010), Anderson et al. (2007), Chune et al. (2012), and Banker et al. (2012) have identified several limited and firm factors that empirically affect cost stickiness. Managers may make wrong decisions regarding the management and consumption of resources, thus reducing the value of the company and reducing the wealth of shareholders. Therefore, managers should experimentally determine the effect of strategies of heavy and light assets, company business, affiliation with business groups, investment, cost-oriented, abundance of debt, revaluation, labor adjustment, tax avoidance, and family ownership for making decisions for resource consumption, causing cost stickiness.
As described in the traditional costing model, the proportionality between the costs and the activity level is not always established and estimating the cost behavior without considering the stickiness behavior of the costs will be misleading.
Knowing the cost behavior is important for accountants, researchers and all related to management and evaluation changes. The managerial implication of this analysis states that cost stickiness can be identified and controlled. Managers should evaluate their reasons for cost stickiness by paying attention to the sensitivity of cost changes to volume reduction to modify the company's response capacity and strategies against reducing demand for goods or services to improve the response process. Company owners can analyze managers’ costs imposed on the firm by specifying cost stickiness (Medeiros & Costa, 2004). According to traditional analysis, the disproportionate increase in operational, distribution, sales, and administrative and organizational costs compared to sales is considered a management control weakness, and the weakness indicates the lack of a suitable strategy according to the companies' conditions. This analysis may be misleading because when these costs are sticky, they will move proportionally with the increase in sales while they will not decrease proportionally with the decrease in sales. However, auditors assume costs change in line with sales fluctuations when performing analytical review procedures. Therefore, a better understanding of the change in costs compared to sales fluctuations will be helpful for shareholders, investors, and stock market operators to improve the implementation of analytical procedures.
The theoretical argument of the current research is that cost stickiness can be influenced by the company's strategies and their effective factors. Therefore, this study experimentally examined the effect of the company's strategies and the factors affecting it on the company's cost stickiness and identified their relationship.
3. Research background:
Banker et al. (2011) evaluated the relationship between management optimism and cost behavior and showed that the greater the optimism (pessimism) of the management, the greater the increase (decrease) in costs in the event of an increase (decrease) in sales. In addition, the higher the analysts' forecast of future sales, the higher the incremental cost adjustment when sales increase.
Kitching et al. (2016) examined the influence of national culture on managerial decisions through cost stickiness in 39 countries and found that cost stickiness is lower in countries with uncertainty avoidance, masculinity, and long-term orientation. Therefore, culture affects the resource management decisions made by managers, and this study plays a significant role in understanding the differences.
Haga et al. (2019) investigated the cost behavior of companies in member countries of the Organization for Economic Cooperation and Development (OECD) before the reduction of corporate tax rates. According to this study, companies reduce public and administrative cost-cutting behaviors before tax rate reduction, which is proportional to the amount of tax rate reduction. Stronger evidence was provided of this form of tax revenue management in lower tax compliance and law items, as well as for private companies.
Collingtong (2020) studied cost stickiness, future corporate losses, and audit fees and showed that the higher the firm's cost stickiness, the more likely the company will incur losses in the future, and the audit costs increase as the firm's cost stickiness increases. According to studies, the cost stickiness of public companies has a smaller effect on the probability of future losses of the company.
Kordestani et al. (2012) assessed the relationship between managers' prudent decisions and cost stickiness in the Iranian capital market and concluded that management optimism in future sales reduces the stickiness of the cost of goods sold, but there is a direct relationship with the stickiness of distribution and sales costs.
Nodeh Farahani (2012) explored the effect of agency fees and managers' bonuses on cost stickiness and stated that these factors affect cost stickiness.
Sepasi et al. (2012) conducted an experimental test of cost stickiness in the Iranian capital market and indicated that the cost of goods sold, distribution and sales and administrative costs, and other operating costs in Iran's capital market have a sticky behavior.
Zanjidar et al. (2014) analyzed the factors affecting the sticky behavior of costs and reported that indicators such as the number of employees, the number of current assets of the company and the debt ratio affect the stickiness of the cost of goods sold and the total operating costs.
Rostami et al. (2015) evaluated the effect off-balance sheet financing and financial restrictions on cost stickiness and found a positive and strong relationship between the intensity of adhesion with off-balance sheet financing and financial constraints in all studied companies regardless of the industry type.
Bahadorestani (2016) investigated the relationship between economic growth and cost stickiness and showed that the costs have a sticky behavior, and the costs have an anti-sticky behavior in the period of economic prosperity, but there is no significant relationship in the recession period. However, the adhesion intensity is higher in the prosperity period than in the recession period.
Ghorbani (2017) examined the effect of managers' characteristics on cost stickiness and revealed that the personal characteristics of managers have a significant effect on cost stickiness.
Dehghanian (2018) studied the relationship between management short-sightedness and cost stickiness and indicated that costs are sticky in the capital market of Iran. In addition, the factor of management's short-sighted behavior causes the intensity of this stickiness of costs in Iran's capital market. No difference was observed in the views of managers in different industries.
Namazi et al. (2019) investigated the moderating effect of agency fees on the relationship between corporate social responsibility and cost stickiness and reported a direct effect of corporate social responsibility on cost stickiness. Moreover, the results showed the effect of agency cost on cost stickiness.
Taheri et al. (2020) assessed the relationship between company strategy, management ability, and cost stickiness and found no significant relationship between company strategy and cost stickiness, as well as management ability and cost stickiness, and both research hypotheses were rejected.
Oskou et al. (2021) explored profit management, corporate governance, and cost stickiness and showed that corporate governance reduces cost stickiness, although it is not a strong factor to reduce profit management. There was a significant positive relationship between profit management and cost stickiness.
4. Research hypotheses:
Main hypothesis: company strategies and their effective factors affect the company’s cost stickiness.
Sub-hypotheses:
The heavy asset strategy affects the company’s cost stickiness.
The light asset strategy affects the company’s cost stickiness.
Company business strategy affects the company’s cost stickiness.
Affiliation with business groups affects the company’s cost stickiness.
Investment strategy affects the company’s cost stickiness.
Cost-oriented strategy affects the company’s cost stickiness.
The abundance of debt affects the company’s cost stickiness.
The asset revaluation strategy affects the company’s cost stickiness.
Labor adjustment affects the company’s cost stickiness.
Tax avoidance affects the company’s cost stickiness.
Family ownership affects the company’s cost stickiness.
5. Method
This applied and descriptive study investigated the relationship between the company's strategies and their effective factors with the level of cost stickiness. The study is theoretically a part of proof research, which also falls into a deductive-inductive category regarding reasoning. In addition, the research methodology is post-event, meaning that the research is based on past information.
The study population included all companies accepted in the capital market of Iran from 2015 to 2020, which were selected by systematic or targeted sampling using the elimination method.
The inclusion criteria were companies whose financial year was at the end of March and activated in the Iranian capital market for at least six years from 2015 to 2020 with available financial statements. These companies should have disclosed the information required to measure the research variables. Finally, 102 companies were selected as a sample according to the considered conditions.
5.1. Research model and variables:
The multiple linear regression method was used to test the hypotheses of the present research, following the previous research conducted on cost stickiness due to the quantitative and continuous nature of the dependent variable.
The dependent variable of the research is cost stickiness, which was measured according to Zhou and Yan Hong (2015) using the logarithm of general, administrative, and organizational costs (Equation 1):
(1)
SGA is the sum of general, administrative, and organizational expenses.
Independent variables include the following: