Earnings management incentives, accruals constraints, and cost stickiness : empirical evidence from Egypt

Abstract EN

This study investigates the relationship between managerial incentives to earnings management and cost stickiness.

I argue that when managers have incentives to earnings management, they tend to increase costs less for an increase in sales and to aggressively cut resources for a decrease in sales and thus cost stickiness decreases.

Three proxies are used for management incentives to earnings management; namely management incentive to avoid loss, incentive to avoid earning decrease, and incentive to avoid loss and/ or earning decrease.

A sample of 940 firm-year observations of non-financial firms listed in the Egyptian Stock Exchange from 2011 to 2017 is used.

The results support my hypotheses and I find that when managers have incentive to manage earnings, costs exhibit an anti-sticky behavior.

These results shed light on the role of motivations underlying managerial decisions in affecting firms' cost behavior.