Financing constraints, internal control quality and cost stickiness
Abstract
Managers think that retaining resources is more effective than rebuilding resources after exhausting them. However, financing constraints have brought great uncertainty to this resource decision-making implemented by managers. Data of manufacturing listed firms in China from 2009 to 2017 are used here to explore the impact of financing constraints on cost stickiness. This paper finds that internal financing constraints have a significant promoting effect on cost stickiness, while debt financing constraints and equity financing constraints have a significant restraining effect on cost stickiness. The internal control quality has a moderation effect on this relationship. In a firm with low quality of internal control, internal financing constraints can enhance cost stickiness, but the weakening effect of external financing on cost stickiness is not affected by internal control quality.
Keyword : financing constraints, financing sources, cost stickiness, adjustment cost, cost management, asymmetric cost behavior, internal control quality
How to Cite
Chen, Y., & Ma, Y. (2021). Financing constraints, internal control quality and cost stickiness. Journal of Business Economics and Management, 22(5), 1231-1251. https://doi.org/10.3846/jbem.2021.14878
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Chen, Y., & Hu, N. (2017). Credit default swaps and cost stickiness. https://doi.org/10.2139/ssrn.3042344
Cheng, Q., Goh, B., & Kim, J. (2014). Internal control and operational efficiency. Contemporary Accounting Research, 35(2), 1102–1139. https://doi.org/10.1111/1911-3846.12409
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Hartlieb, S., Loy, T., & Eierle, B. (2020a). Does community social capital affect asymmetric cost behaviour? Management Accounting Research, 46, 100640. https://doi.org/10.1016/j.mar.2019.02.002
Hartlieb, S., Loy, T., & Eierle, B. (2020b). The effect of generalized trust on cost stickiness: Cross-country evidence. The International Journal of Accounting, 55(4), 2050018. https://doi.org/10.1142/S1094406020500183
Hassanein, A., & Younis, M. (2020). Cost stickiness behavior and financial crisis: Evidence from the UK chemical industry. Corporate Ownership & Control, 17(2), 46–56. https://doi.org/10.22495/cocv17i2art4
Homburg, C., Hoppe, A., Nasev, J., Reimer, K., & Uhrig-Homburg, M. (2018). Cost stickiness and credit risk (Working Paper). https://doi.org/10.2139/ssrn.2792085
Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Kaplan, S., & Zingales, L. (2000). Investment-cash flow sensitivities are not valid measures of financing constraints. The Quarterly Journal of Economics, 115(2), 707–712. https://doi.org/10.1162/003355300554782
Kim, J., Lee, J., & Park, J. (2019). Internal control weakness and the asymmetrical behavior of selling, general, and administrative costs. Journal of Accounting, Auditing and Finance. https://doi.org/10.1177/0148558X19868114
Li, W., & Zheng, K. (2017). Product market competition and cost stickiness. Review of Quantitative Finance and Accounting, 49(2), 283–313. https://doi.org/10.1007/s11156-016-0591-z
Malik, M. (2012). A review and synthesis of “cost stickiness” literature (Working Paper). https://doi.org/10.2139/ssrn.2276760
Navarro, P., Robb, S., Sutton, S., & Weisner, M. (2020). The cost stickiness of information technology material weaknesses: An intertemporal comparison between it-related and other material weaknesses. International Journal of Accounting Information Systems, 37, 100454. https://doi.org/10.1016/j.accinf.2020.100454
Noreen, E. (1991). Condition under which activity-based cost systems provided relevant cost. Journal of Management Accounting Research, 3, 159–168. https://cpb-us-w2.wpmucdn.com/u.osu.edu/dist/8/36875/files/2016/12/Noreen-JMAR-1991-vrlob7.pdf
Noreen, E., & Soderstrom, N. (1997). The accuracy of proportional cost models: Evidence from hospital service departments. Review of Accounting Studies, 2(1), 89–114. https://doi.org/10.1023/A:1018325711417
Pfann, G., & Palm, F. (1993). Asymmetric adjustment costs in non-linear labor demand models for the Netherlands and U.K. manufacturing sectors. Review of Economic Studies, 60(2), 397–412. https://doi.org/10.2307/2298064
Prieto, A. (2019). Does cost stickiness affect capital structure? Evidence from Korea. Journal of Management Accounting Research, 19(2), 27–57. https://doi.org/10.31507/KJMAR.2019.8.19.2.27
Salehi, M., Ziba, N., & Gah, A. (2018). The relationship between cost stickiness and financial reporting quality in Tehran Stock Exchange. International Journal of Productivity and Performance Management, 67(9), 1550–1565. https://doi.org/10.1108/IJPPM-10-2017-0255
Subramaniam, C., & Weidenmier, M. (2016). Additional evidence on the sticky behavior of costs. Advances in Management Accounting, 26, 275–305. https://doi.org/10.1108/S1474-787120150000026006
Sun, Z., & Liu, H. (2004). The expense “stickiness” behavior of Chinese listed firms. Economic Research Journal, 12, 26–34 (in Chinese). https://kns.cnki.net/kcms/detail/detail.aspx?FileName=JJYJ200412003&DbName=CJFQ2004
Tan, W., & Ma, Z. (2016). Ownership, internal capital market, and financing costs. Emerging Markets Finance and Trade, 52(5), 1259–1278. https://doi.org/10.1080/1540496X.2016.1138815
Tang, Q. (2020). Cost stickiness, corporate future losses and audit costs. American Journal of Industrial and Business Management, 10(1), 110–134. https://doi.org/10.4236/ajibm.2020.101008
Yasukata, K. (2011). Are “Sticky Costs” the result of deliberate decision of managers? (Working Paper). Kinki University. https://doi.org/10.2139/ssrn.1444746
Zhu, Q., & Yang, Y. (2019). Study on supply chain finance, internal control and SMEs financing constraints. In Advances in Economics, Business and Management Research: Vol. 91. 1st International Symposium on Economic Development and Management Innovation (EDMI 2019) (pp. 442–449). Atlantis Press. https://doi.org/10.2991/edmi-19.2019.73
Anderson, M., Banker, R., & Janakiraman, S. (2003). Are selling, general, and administrative costs “sticky”? Journal of Accounting Research, 41(1), 47–63. https://doi.org/10.1111/1475-679X.00095
Banker, R., Byzalov, D., & Chen, L. (2013). Employment protection legislation, adjustment costs and cross-country differences in cost behavior. Journal of Accounting and Economics, 51(1), 111–127. https://doi.org/10.1016/j.jacceco.2012.08.003
Banker, R., Byzalov, D., & Plehn-Dujowich, J. (2011). Sticky cost behavior: Theory and evidence. AAA 2011 Management Accounting Section (MAS) Meeting Paper. https://doi.org/10.2139/ssrn.1659493
Banker, R., & Johnston, H. (1993). An empirical study of cost drivers in the U.S. airline industry. The Accounting Review, 68(3), 576–601. https://www.jstor.org/stable/248202?seq=1
Baumgarten, D. (2012). Cost stickiness phenomenon: Causes, characteristics and implications for fundamental analysis and financial analysts forecasts. Springer. https://doi.org/10.1007/978-3-8349-4131-2
Bradbury, M., & Scott, T. (2018). Do managers forecast asymmetric cost behavior? Australian Journal of Management, 43(4), 538–554. https://doi.org/10.1177/0312896218773136
Calleja, K., Steliaros, M., & Thomas, D. (2006). A note on cost stickiness: Some international comparison. Management Accounting Research, 12(2), 127–140. https://doi.org/10.1016/j.mar.2006.02.001
Campello, M., Graham, J., & Harvey, C. (2010). The real effects of financial constraints: Evidence from a financial crisis. Journal of Financial Economics, 97(3), 470–487. https://doi.org/10.1016/j.jfineco.2010.02.009
Chen, C., Lu, H., & Sougiannis, T. (2012). The agency problem, corporate governance, and the asymmetrical behavior of selling, general, and administrative costs. Contemporary Accounting Research, 29(1), 252–282. https://doi.org/10.1111/j.1911-3846.2011.01094.x
Chen, C., Gores, T., Nasev, J., & Wu, S. (2021). CFO overconfidence and cost behavior. Journal of Management Accounting Research, 33. https://doi.org/10.2308/JMAR-18-055
Chen, Y., & Hu, N. (2017). Credit default swaps and cost stickiness. https://doi.org/10.2139/ssrn.3042344
Cheng, Q., Goh, B., & Kim, J. (2014). Internal control and operational efficiency. Contemporary Accounting Research, 35(2), 1102–1139. https://doi.org/10.1111/1911-3846.12409
Cheng, S., Jiang, W., & Zeng, Y. (2016). Does access to capital affect cost stickiness? Evidence from China. Asia-Pacific Journal of Accounting & Economics, 25(1–2), 177–198. https://doi.org/10.1080/16081625.2016.1253483
China Securities Regulatory Commission. (2012). Guidelines for Listed Firms’ Industry Classification (Revised 2012). http://www.csrc.gov.cn/pub/zjhpublic/G00306201/201211/t20121116_216990.htm
China Securities Regulatory Commission. (2018). Regulatory Requirements for Guiding and Regulating the Financing Behavior of Listed Firms. http://www.csrc.gov.cn/pub/newsite/zjhxwfb/xwdd/201811/t20181109_346511.html
Choi, S., Hwang, I., Lee, M., & Lee, W. (2017). Cost stickiness of private and public firms (Working Paper). https://ssrn.com/abstract=3019762
Dierynck, B., Landsman, W., & Renders, A. (2012). Do managerial incentives drive cost behavior? Evidence about the roles of the zero earnings benchmark for labor cost behavior in Belgian private firms. The Accounting Review, 87(4), 1219–1246. https://doi.org/10.2308/accr-50153
Doms, M., & Dunne, T. (1998). Capital adjustment patterns in manufacturing plants. Review of Economic Dynamics, 1(2), 409–429. https://doi.org/10.1006/redy.1998.0011
Fazzari, S., Hubbard, R., Petersen, B., Blinder, A., & Poterba, J. (1988). Financing constraints and corporate investment. Brookings Papers on Economic Activity, (1), 141–195. https://doi.org/10.2307/2534426
Hall, B., & Lerner, J. (2010). The financing of R&D and innovation. In B. Hall & N. Rosenberg (Eds), Handbook of the economics of innovation (pp. 609–639). Elsevier. https://doi.org/10.1016/S0169-7218(10)01014-2
Hartlieb, S., Loy, T., & Eierle, B. (2020a). Does community social capital affect asymmetric cost behaviour? Management Accounting Research, 46, 100640. https://doi.org/10.1016/j.mar.2019.02.002
Hartlieb, S., Loy, T., & Eierle, B. (2020b). The effect of generalized trust on cost stickiness: Cross-country evidence. The International Journal of Accounting, 55(4), 2050018. https://doi.org/10.1142/S1094406020500183
Hassanein, A., & Younis, M. (2020). Cost stickiness behavior and financial crisis: Evidence from the UK chemical industry. Corporate Ownership & Control, 17(2), 46–56. https://doi.org/10.22495/cocv17i2art4
Homburg, C., Hoppe, A., Nasev, J., Reimer, K., & Uhrig-Homburg, M. (2018). Cost stickiness and credit risk (Working Paper). https://doi.org/10.2139/ssrn.2792085
Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Kaplan, S., & Zingales, L. (2000). Investment-cash flow sensitivities are not valid measures of financing constraints. The Quarterly Journal of Economics, 115(2), 707–712. https://doi.org/10.1162/003355300554782
Kim, J., Lee, J., & Park, J. (2019). Internal control weakness and the asymmetrical behavior of selling, general, and administrative costs. Journal of Accounting, Auditing and Finance. https://doi.org/10.1177/0148558X19868114
Li, W., & Zheng, K. (2017). Product market competition and cost stickiness. Review of Quantitative Finance and Accounting, 49(2), 283–313. https://doi.org/10.1007/s11156-016-0591-z
Malik, M. (2012). A review and synthesis of “cost stickiness” literature (Working Paper). https://doi.org/10.2139/ssrn.2276760
Navarro, P., Robb, S., Sutton, S., & Weisner, M. (2020). The cost stickiness of information technology material weaknesses: An intertemporal comparison between it-related and other material weaknesses. International Journal of Accounting Information Systems, 37, 100454. https://doi.org/10.1016/j.accinf.2020.100454
Noreen, E. (1991). Condition under which activity-based cost systems provided relevant cost. Journal of Management Accounting Research, 3, 159–168. https://cpb-us-w2.wpmucdn.com/u.osu.edu/dist/8/36875/files/2016/12/Noreen-JMAR-1991-vrlob7.pdf
Noreen, E., & Soderstrom, N. (1997). The accuracy of proportional cost models: Evidence from hospital service departments. Review of Accounting Studies, 2(1), 89–114. https://doi.org/10.1023/A:1018325711417
Pfann, G., & Palm, F. (1993). Asymmetric adjustment costs in non-linear labor demand models for the Netherlands and U.K. manufacturing sectors. Review of Economic Studies, 60(2), 397–412. https://doi.org/10.2307/2298064
Prieto, A. (2019). Does cost stickiness affect capital structure? Evidence from Korea. Journal of Management Accounting Research, 19(2), 27–57. https://doi.org/10.31507/KJMAR.2019.8.19.2.27
Salehi, M., Ziba, N., & Gah, A. (2018). The relationship between cost stickiness and financial reporting quality in Tehran Stock Exchange. International Journal of Productivity and Performance Management, 67(9), 1550–1565. https://doi.org/10.1108/IJPPM-10-2017-0255
Subramaniam, C., & Weidenmier, M. (2016). Additional evidence on the sticky behavior of costs. Advances in Management Accounting, 26, 275–305. https://doi.org/10.1108/S1474-787120150000026006
Sun, Z., & Liu, H. (2004). The expense “stickiness” behavior of Chinese listed firms. Economic Research Journal, 12, 26–34 (in Chinese). https://kns.cnki.net/kcms/detail/detail.aspx?FileName=JJYJ200412003&DbName=CJFQ2004
Tan, W., & Ma, Z. (2016). Ownership, internal capital market, and financing costs. Emerging Markets Finance and Trade, 52(5), 1259–1278. https://doi.org/10.1080/1540496X.2016.1138815
Tang, Q. (2020). Cost stickiness, corporate future losses and audit costs. American Journal of Industrial and Business Management, 10(1), 110–134. https://doi.org/10.4236/ajibm.2020.101008
Yasukata, K. (2011). Are “Sticky Costs” the result of deliberate decision of managers? (Working Paper). Kinki University. https://doi.org/10.2139/ssrn.1444746
Zhu, Q., & Yang, Y. (2019). Study on supply chain finance, internal control and SMEs financing constraints. In Advances in Economics, Business and Management Research: Vol. 91. 1st International Symposium on Economic Development and Management Innovation (EDMI 2019) (pp. 442–449). Atlantis Press. https://doi.org/10.2991/edmi-19.2019.73