The Influence Of Free Cash Flow And Corporate Governance On Expense Stickiness

In recent years, expense stickiness has become one of the hottest issues in the accounting research field. It describes a character that expense increase more when sales volume rises than they decrease when sales volume falls by an equivalent amount. So, is expense stickiness widespread? What kind of level does the stickiness keep? Does the management of the company deliberately make the expense stickier? And what factors is expense stickiness influenced by? All the questions prompt us to make further exploration to expense stickiness which not only helps to reveal the"black box"of the company cost management behavior, but also bridges the the interaction between management accounting and financial accounting.Currently, the prevailing interpretation of expense stickiness is based on the theory of opportunism which insists that the management pursue the private benefit through expense occupy and then make the expense sticky. From this perspective, corporate governance is an important mechanism to curb the trend of the self-benefit behavior of management and can make a negative influence on expense stickiness. So the study of corporate governance’s inhibition on stickiness is of great significance to the expense management.Firstly, this paper explores the stimulation of the free cash flow on management self-interest behaviors and the generation of expense stickiness from the perspective of agency. Then it introduces the relief effect of corporate governance mechanism on principal-agent problems and even expense stickiness. On the basis of theoretical analysis, this paper selects the manufacturing listed companies in A-share market of Shanghai Stock Exchange and Shenzhen Stock Exchange from2008to2011as the research object to make an empirical study in three aspects as following:1) The existence of expense stickiness in listed companies.2) The influence of free cash flow on expense stickiness.3) The different effects of corporate governance mechanism on expense stickiness in different levels of free cash flow.The empirical results show that Expense stickiness really exists in Chinese listed companies and the free cash flow which strengthens the self-benefit motivation of management induces expense stickiness. The higher the free cash flow is, the greater expense stickiness turns to be. What’s more, under the circumstance of high free cash flow, the corporate governance plays a better role in reducing expense stickiness such as properly decentralized ownership, balance of shareholder structure, moderately larger board of directors, chairman/CEO duality and management buy-out. Accordingly, this paper raises some proper suggestions to limit the expense stickiness which is generated by the self-benefit behaviors of management from the angel of corporate governance, including optimizing the ownership structure, improving the board of directors system as well as promoting the managerial equity incentives. This study is aimed to solve the agency problem of management and shareholders and enhance the daily expense management level and business performance of listed companies in China.