Free Cash Flow, Corporate Governance And Cost Stickiness

Cost stickiness is a hot research topic in recent management accounting. Cost management is a very important part of enterprise management. At present, the external environment is becoming much fiercer and the managers need a deeper understanding of the cost, in order to reduce costs and increase profits. But when scholars explore the cost behavior deeply, they found that the relationship between the cost and the volume of business is not as simple as the traditional cost behavior theory. When the volume of business increased, the cost of business volume is greater than equal decline cost reduction. This asymmetry is defined as the cost stickiness. More and more scholars begin to study the phenomenon of cost stickiness, but the reasons and the influence factors of the cost stickiness are still suppressed and uncertain.This paper first defines the concept of cost stickiness, and then reviews and summarizes the domestic and foreign literature, including the existence of cost stickiness, the impact of cost stickiness and the economic consequences of the cost stickiness. Based on the theory of free cash flow, agency theory and corporate governance theory, the paper studies the theoretical reasons of the company’s free cash flow’s promotion to the cost stickiness. Finally, the paper takes the period from 2008-2014 as the studying period and uses the data of manufacturing listed companies in A-share market of Shanghai and Shenzhen Stock Exchange to conduct an empirical test including the following three questions:(1) the impact of free cash flow on the cost stickiness;(2) the impact of corporate governance on the cost stickiness;(3) the difference of free cash flow on the cost stickiness when the cash flow is different.The empirical results show that free cash flow promotes the degree of cost stickiness and a larger board size, an increase on the proportion of independent directors, the separation of CEO and chairman, an increase on the proportion of institutional investors and the first largest shareholder shareholding can alleviate the phenomenon of cost stickiness.When there is a high free cash flow, the inhibiting impact of corporate governance on the cost stickiness is more obvious.Finally, this paper puts forward some suggestions to limit the degree of cost stickiness, including strengthen the control of free cash flow, improve the ownership structure, and the governance of the board of directors.This study is aimed to help to alleviate the problem of management and shareholders, to improve the company’s daily expenses management level and to improve the level of the company’s operating performance in china.