Earnings Manipulation And Cost Stickiness

In recent years, cost stickiness has become one of the hottest issues in the accounting field. The definition of cost stickiness is that the magnitude of the increase in costs associated with an increase in volume is greater than the magnitude of the decrease in costs associated with an equivalent decrease in volume. That is to say, costs rise more with increases in activity volume than they fall with decreases. However, in the traditional model of cost behavior, costs are variable with respect to changes in activity volume. It means that the increase in costs associated with an equivalent decrease in volume. Obviously, cost stickiness does not conform to the traditional assumption that the relation between costs and volume is symmetric for volume increases and decreases.At present, there are three main factors that drive the variation in the degree of cost stickiness. The main factors are the magnitude of adjustment costs, the expectations for future sales, and agency issues. Among those factors, agency issues is the more popular interpretation of cost stickiness. On the one hand, self-interested managers might want to increase their own compensation and maximize the resources under their control when sales increase. On the other hand, self-interested managers will not decrease their own compensation and cut the resources under their control when sales decrease. This leads to cost stickiness. It is observed that previous studies concerned mainly on the agency issues. If the degree of cost stickiness is higher, the agency issues is more serious. The issue reflects that the firm’s costs control has problems. This view ignores the motivations underlying managers’resource adjustments. Especially, the managers’ incentives when their compensation is linked to reported profit.Those incentives lead managers to make decisions to maximize their personal utility, not firm value. For example, managers are likely to eliminate slack resources when facing incentives to avoid loss and sales fall, even if they expect the sales drop to be temporary. Incentives to meet earnings targets lead managers to cut resources more when sales fall than would be optimal from the perspective of maximizing firm value. In turn, the deliberate decisions lessen the degree of cost stickiness. Then the lower degree of cost stickiness does not represent that the firm’s agency issues are not serious and good control of costs. Therefore, agency issues may reinforce or diminish cost stickiness, depending on the circumstances.Under agency theory framework, this paper will study cost stickiness from earnings manipulation’s perspective. Firstly, we test if cost stickiness exists. Secondly, we study the influence of earnings manipulation motivation on cost stickiness. Earnings manipulation motivation includes four incentives, and they are respectively avoiding loss, turning profit, taking bath and moving profit. Finally, we continue to discuss the influence of earnings manipulation’s ways on cost stickiness. Listed companies manage earnings through both accruals and real activities.The research of these questions can make up to the insufficient of the traditional cost behavior, and can help to understand the cost management, because it is hard to obtain research data of cost and management accounting. The cost management of the company is just like a black box, it’s hard to observe and measure,.however, cost stickiness provides a clue to open the black box.This paper comes to the following conclusions:Firstly, in our country, selling and administrative cost are sticky on the whole. We find that that selling and administrative costs increase on average0.4588%per1%increase in sales but decrease only0.2868%per1%decrease in sales. Our evidence documents, in a broad sense, the prevalence of sticky cost behavior for selling and administrative costs in our country’s listed companies.Secondly, different direction of earnings manipulation of motivations will produce different effect on cost stickiness. Our evidence documents that the downward earnings manipulation motivations decrease the degree of cost stickiness and the upward earnings manipulation motivations increase the degree of cost stickiness. The incentive of smoothing profits doesn’t influence cost stickiness.Thirdly, the positive accruals does not have a significant impact on cost stickiness.The negative accruals has a positive influence on the degree of cost stickiness. The real activities has a negative influence on the degree of cost stickiness. In order to increase earnings, listed companies can use discretionary accrual and real activities. The results prove that listed companies may use real activities manipulate profits. From the perspective of cost stickiness, we can find the alternative between accruals management and real earning management.The contributions of this paper are as follows:(1)In the paper, we study the influence of earnings manipulation motivation from two aspects, one is increasing earnings motivation, the other is decreasing earnings motivation. At the same time, we study the influence of real earnings manipulation’s on cost stickiness. This paper enriches the domestic literature about real cost stickiness and earnings management.(2)Agency issues doesn’t only reinforce the degree of cost stickiness. In certain circumstances, it may lessen the degree of cost stickiness. However, there are few literature study this issue in the domestic. his paper enriches the domestic literature about this issue.(3)By studying the earnings manipulation on cost stickiness, it can help investors more rational on cost stickiness. Because the lower cost sticky doesn’t mean the firm has a good control of cost.(4)This paper helps the researchers and investors realize that if we use the company’s financial data for research, then we might get the distorted cost stickiness, for the accruals and real activities exist. So we should do field research.The inadequacies of this paper are as follows:(1)In this paper, we only choose the four types of motivation as the representative of earnings manipulation motivations. This paper does not include other motivations.(2)Under accruals manipulation, the cost sticky that we observed may not true. But in the face of this problem, we did not put forward effective suggestions.