Impact Of Corporate Governance And Managers’ Incentives On The Expense Stickiness

Expense habits directly reflects managers’ decision-making effect involved in the daily work, and researching expense habits has important implications for cost management enhancing. Therefore, the expense stickiness has become a hot research issue in recent years in accounting profession. Traditional expense concept holds that expense changes along with revenues in symmetric way. However expense stickiness concept breaks this view and considers that expense will not always change along with revenues in symmetric way and it typically exhibits a viscosity character. That is marginal increase of expense when revenues increase is greater than the marginal decline of expense when revenues decrease. Scholars hold different opinions about the cause of expense stickiness, there are three main causes of the current view, that is “contractual concept”, “efficiency view” and “opportunistic view”. One of the most mainstream view is "opportunistic outlook" and it can explain most expense stickiness situations. The idea believes that the separation of ownership and management leads to the existence of the agency relationship. As self-interest managers, they always maximize their own interests resulting in the sacrifice of shareholders’ interests and the occupation of expense and expense stickiness appears. Therefore the paper start with “opportunistic outlook” as a theoretical support.Firstly, paper deeply researches managers’ self-benefit incentives inherent in the concept of opportunism, and then explores the impact of managers’ compensation structure on the managers’ self-benefit incentives from a theoretical point, finding that changes in managers’ compensation structure will stimulate the implementation of managers’ self-benefit incentives. Then, paper analyzes the theoretical motives about management’s selfish promoting expense stickiness from the perspective of agency theory. Finally, combining the solving way of agency problem, paper finds an effective mechanism: corporate governance and that corporate governance can mitigate agency problems thus restrict the emerge of expense stickiness. After theoretical analysis, paper selects the manufacturing companies’ data listed in A-share market of Shanghai Stock Exchange and Shenzhen Stock Exchange from 2011 to 2013 and gets the empirical results: expense stickiness is common; managers’ self-benefit incentives and expense stickiness show a positive correlation; corporate governance can effectively suppress managers’ self-benefit incentives to improve expense management. Finally, based on the findings, article gives the recommendation about suppressing the expense stickiness based on the cause of expense stickiness and the governance mechanisms. To certain extent, the study helps companies improve their business performance and enhance expense management.