Cost Stickiness, Firm Value, and the Effect of Managerial Ability

[Purpose] This paper intends to identify the effect of cost stickiness on firm value depending on firm specific adjustment cost and analyze how managerial ability affects the relation between cost stickiness and firm value. Although cost stickiness is an essential part of a firm's business strategies, the association of cost stickiness and the firm value are nearly unknown. Thus, this study shows that the cost stickiness differently affects firm value depending on the firm characteristics. [Methodology] The sample consists of companies for which financial data are available among U.S. listed companies between 1998 and 2018. Using the cost stickiness measure by Weiss (2010), we test whether cost stickiness is associated with a firm value(Tobin’s Q) and whether this relation is affected by managerial ability measured by Demerjian et al. (2012) model. [Findings] We find that there is a significant negative relationship between cost stickiness and firm value only in the lowest adjustment cost group. This result indicates that firm value with a low level of adjustment cost decrease as the cost stickiness increases because this cost stickiness occurs from an agency problem. But for the firms with high adjustment costs, the two motivations, adjustment cost, and agency problem, are mixed for the cost stickiness. Furthermore, if firms’ managers have high abilities, the managerial ability mitigates the negative relation between firm value and cost stickiness. [Implications] This study has contributed to the empirical analysis of the effect of managerial deliberate cost behavior on firm value. In addition, by using managerial ability measures by Demerjian et al. (2012), we show that managerial characteristics can affect firm value through the cost behavior strategy. Furthermore, we try to identify whether cost stickiness primarily reflects rational resource management or an agency problem and study how observed cost stickiness affects the firm value.