Cost stickiness and the implications for future performance

When firms face a decline in their activity level, managers are confronted with the dilemma of retaining unutilized resources or removing committed resources and incur adjustment costs to replace these resources when demand is restored. The decision to keep unutilized resources leads to cost stickiness, namely, the phenomenon when costs decrease by less percentage than the decrease in the activity level. Sticky costs can send a positive or negative signal about future performance depending on the reasons why costs are not adjusted as response to a decrease in the activity level. Managers will most likely keep excess resources if there are more profitable investment projects available in the future. Thus, this book examines the relationship between cost stickiness and future performance and whether this relationship is moderated by the Investment Opportunity Set, which measures the value of a firm's investment opportunities. While it is unclear whether cost stickiness affects positively or negatively future performance, the analysis should be beneficial to managers, financial analysts, auditors,governments and business researchers when assessing the consequences of cost stickiness.