Agency Problem, Cost Stickiness And Corporate Performance

Cost behavior refers to how costs change when there is a change in an organization's level of activity in management accounting. We usually assumes the cost behavior is linear. That is to say, managers' choices do not play an explicit role in the traditional model, and costs are driven only by the activity level in the current period, without any relation to activity levels in the past or in the future. The traditional model implies a mechanical relation between changes in costs and contemporaneous changes in activity such as sales, and this relation is symmetric for increases and decreases in sales. Because of the simplicity, the linear cost behavior deviates from the organization's actual condition. Contemporary studies on cost behaviour find that costs increase more with activity increases than they decrease in response to equivalent activity decreases. This sticky cost behaviour contradicts the traditional model which assumes that costs behave symmetrically for activity increases and decreases. We have to think about the validity of linear cost bhavior and some methods in management accounting under the condition of new economy. And we must change the traditional ideas about cost management, renew the thought of fundamental analysis, and rationally evaluate the corporate performance. Therefore, the paper will do in-depth research about cost stickiness.The paper is organized as follows. Chapter 1 elaborates the background and significance(including the theoretical significance and application value) of the topic, briefly introduces the content of the research and problems intended to solve, and at last describes the possible contributions to the literature of cost stickiness at home. Chapter 2 is the literature review about cost stickiness at home and abroad. Chapter 3 analyzes the cost stickiness of China's listed companies in view of agency problem. This part first examines whether selling costs and administrative costs as a whole behave sticky and compares selling costs with administrative costs in cost stickiness, and then probes the relationship between agency problem(measured by free cash flow) and cost stickiness. In Chapter 4, we present empirical evidence on the relationship between cost stickiness and corporate derformance based on fundamental analysis. Concluding comments are set out in Chapter 5. This part summarizes the results and offers some policy implications, then points out the contributions and limitations of this research.Using data for China's listed companies in stock markets of Shanghai and Shenzhen over the period 2007-2010, we find:1) Selling costs and administrative costs as a whole behave sticky, and selling costs differs significantly from administrative costs in cost stickiness. The stickiness of selling costs is not significant, whereas administrative costs behave sticky significantly.2) Cost stickiness is positively associated with free cash flow, suggesting that the agency problem provides an additional explanation for cost stickiness.3) Based on cost fixity and cost stickiness, administrative cost ratio provides negative information about one-year-ahead earnings during periods in which operating revenue increases whereas one-year-ahead earnings are positively related to changes in the administrative cost ratio in periods in which operating revenue declines. We examines the influence of the administrative cost ratio on subsequent operating earnings in more detail and finds that the current increase of administrative costs contributes to lower one-year-ahead administrative costs, and thus enhances the profitability.There are two innovations in this paper. So far as we know, the paper provides the first large-sample empirical evidence for an additional explanation for cost stickiness phenomenon from the agency perspective at home. In addition, the paper also provides empirical evidence on cost stickiness and corporate performance. Of course, there are several limitations in this paper. For instance, a limitation of the paper is that the sample data used in the paper is confined to the annual data of China's listed companies from 2007 to 2010 Therefore, the conclusion derived from this paper is imperfect. Nevertheless, this paper also helps us to correctly understand the behavior of cost stickiness.