A Study On The Relationship Of Corporate Governance, Managers’ Incentives And Cost Stickiness

Cost management is an important part of enterprise management. The study oncost behavior helps mangers to make cost decision, investors and others to forecastcorporate performance. As a kind of manifestation of cost behavior, the research oncost stickiness is rooted in considering the accuracy of mangers’ decisions based ontraditional cost behavior model. The starting point of this paper is that how tomotivate manger more positively cost management and restrict their less negative costdecision based on the hypothesis that mangers have impact on cost stickiness.Cost management is related to the success and failure of enterprise, but themangers incentive is the real force behind cost management. Different incentives ofmangers have different impact on cost behavior, and the purpose of the design ofcorporate governance is to achieve checks and balance of shareholders to mangers.Therefore, this paper studies the relationship between corporate governance, mangersincentives and cost stickiness. The results help us to understand the ways of mangersdifferent incentives on cost stickiness and provide more comprehensive theoreticalsupports for application of expense ratio. And these conclusions have practicalsignificance on how to strengthen corporate governance in order to restrict themanagers’ self-interest incentive and reduce the agency problem and how tostrengthen cost control to enhance the value of companies.Based on the theoretical basis and the literature review about characteristics,causes, in and economic consequences of cost stickiness, this paper first research theessential caused and influencing factors by theoretical analysis, then study the impactof optimal-decision incentive, earnings management incentive and the Self-interestincentive on cost stickiness. We find that (1) companies that manger haveoptimal-decision incentive exhibit cost stickiness significantly;(2) companiesreporting small positive earnings exhibit a more symmetric cost behavior andcompanies that manger have incentives to add and distribute stocks exhibit costanti-stickiness;(3)the self-interest incentive of managers has a significant positiveimpact on cost stickiness. Specifically, the merger and acquisition events provideopportunity for managers with self-interest incentive; sufficient free cash flow and alonger tenure are necessary for managers to achieve their own interests; and morefixed pay in managers’ compensation would stimulate managers’ self-incentives.Furthermore, we examine the constraints of corporate governance on the managers’ self-interest incentive. And results show that strong governances can restrictmanagers’ self-interest incentives, resulting in a lower level of cost stickiness; andmanagers’ self-interest incentives is obvious in weak governance companies withhigher level of cost stickiness. Furthermore, the study found that the relation betweenthe level of corporate governance and the value of companies is significantly positive.From that we can see, the cost stickiness resulted by mangers’ optimal-decisionincentive will deliver a positive signal of the growth of the value of company, and thecost stickiness resulted by mangers’ self-interest incentive shows the inefficient costmanagement and delivers a negative signal of the growth of the value of company.Finally, we conclude our study and make suggestion for mangers’ scientific andrational cost management decision-making.