The Impact Of Incentives To Meet Earnings Target On Cost Stickiness

This study explores do motivations underlying managers’ resource adjustments affects costs sticky. Cost sticky refers to costs decrease less when sales fall than they increase when sales rise by an equivalent amount. Factors such as adjustment costs, agency problems and managerial expectations cause the costs sticky, and we can explain it from the contract concept, efficiency concept and the concept of opportunism these three perspectives. Cost sticky made us recognize that, unlike the conventional management accounting linear models, cost management behavior of managers will impact cost, and it will no longer changes asymmetrically to sales. However, due to the managers in making management decisions will consider their own interests, and then engage in self-serving activities, costs sticky will be affected. Therefore, research of the impact of incentives to meet earnings targets on resource adjustments and the ensuing cost structures, helping us better understand the behavior of management’s cost decision and design more effective corporate governance mechanisms.From the perspective of the management incentives, this paper studied how the profit target incentive impact on costs sticky by theoretical analysis and empirical testing the two factors, which is significant to fully understand the managers selfish motives behind the resource adjust decision, to set a rational incentive goals, and to control costs sticky.This paper summarizes the related researches on costs sticky, summarized the causes, characteristics, factors and significance of costs sticky, pointed out the deficiencies in the current study, and proposed this research’s entry points and ideas. Then, based on the domestic and foreign research results and the characteristics of Chinese capital market, we raised the basic theory of empirical research supporting this article from the perspective of managers’ behavior, then we divided meet earnings targets incentives into incentives to avoid losses, incentive to avoid surpluses declining and alternating excitation incentives(to avoid losses or to avoid surplus falling), studied the impact of specific factors on the cost sticky, gradually raised the hypothesis of this paper. Then we defined the independent variable, dependent variables and control variables, independent variables and control variables were added to the basis of ABJ(2003) model and constructed some multiple regression models, then we selected non-financial companies listed on our 2000-2012 annual data for empirical analysis. The results showed that:(1) Chinese listed companies exist cost sticky;(2) When there is a meet earnings target incentive, the degree of cost sticky will be reduced;(3) For a given decrease in sales, managers cut costs more aggressively in the presence of incentives to meet earnings targets than absent these incentives;(4) Managers’ current incentives diminish the degree of current cost stickiness, and managers’ incentives in the prior period increase the degree of cost stickiness in the current period, if managers face incentives to meet an earnings target in two consecutive periods, then the degree of cost stickiness is not diminished, even though current incentives reduce stickiness;(5) Incentives to meet earnings targets diminish the degree of cost stickiness(or, equivalently, increase the degree of anti-stickiness in the pessimistic case) even after controlling for managers’ demand expectations, and the impact of incentives to meet earnings targets on the degree of cost stickiness is stronger in the pessimistic case than in the optimistic case.These thesis make three innovations to extant literature.(1) Research originality. This is the first study of the impact of incentives to meet earnings target on cost sticky, pointing out the relationships between the incentives to meet earnings target and cost sticky from the source.(2) Extensive of the sample. In this paper, we selected 2000-2012, Chinese listed companies as samples for study, has a better sample breadth;(3) Practicality of the research. This study provided theoretical basis and reference for managers’ cost management decisions, and help shareholders to take appropriate incentives, setting the appropriate incentive target, to control costs sticky within a reasonable range.