The Impact Of Earnings Pressure On Cost Behavior

Cost management is one of the cores of business management, and understanding cost behavior clearly is undoubtedly of great significance to managers. Traditional cost models assumes that variable costs change symmetrically and proportionally with changes in activity levels (Noreen 1991), but recent empirical research documents asymmetry in cost behavior in which costs decrease more slowly with an activity decrease than they increase with an activity increase, which is called "sticky cost" (Anderson et al.2003; Su Zheng, Liu Hao,2004). The existing research generally more focused on the stickiness of operating costs or administrative expenses, however, paid less attention on labor cost, which accounted for a large portion of the total cost (Anderson and Lanen 2007). This paper is intended for the stickiness of labor cost in domestic enterprises, studying the influence of earnings management behavior due to the pressure of the profitability on it.This paper selects listed companies of A-share in China in the year of 2009-2012 as sample data to study whether labor cost of domestic enterprises is "sticky", as well as at different earnings management objectives, the impact of the manager’s different behavior in adjusting labor cost. We find:(1) Labor cost of domestic enterprises is sticky; (2) The stickiness of small profit enterprises is lower than that of large profit enterprises; (3) The stickiness of enterprises in the Small and Medium-sized Enterprises Market and the Growth Enterprise Market is lower than that of enterprises in the main board. (4) The stickiness of the state-owned enterprises is not significantly higher than the non-state-owned enterprises. In addition, we also study the specific decisions of the managers to adjust labor cost, and find weak evidence that more companies prefer to change the salary per capita of employees in the main board, while in the Small and Medium-sized Enterprise Market more preference to change the number of employees; at the same time, less managers are willing to reduce compensation of senior executive to achieve lower total labor cost.We study the stickiness of labor cost for the first time in China, connect the earnings management behavior and the "sticky" cost, present evidence that variations in cost behavior are driven by managerial incentives, and extend recent work about the "sticky" cost in China.