The Relationship between Cost Stickiness, Unexpected Earnings, and subsequent Market Reactions

In this paper we investigate the effect of cost stickiness on the relationship between unexpected earnings (UE) and buy-and-hold abnormal return (BHAR). We also examine whether financial analysts transmit earnings information related to cost stickiness to investors and whether this mediates the response of capital markets to earnings. Our dataset consisted of non-financial companies listed on KOSPI and KOSDAQ from 2010 to 2019 for which the FN-Guide database could be used to collect relevant variables, and included 5,444 firm-year observation values. We relied on the Weiss (2010) model to determine cost stickiness, while the measured value of the market reaction was assessed using the BHAR model. Cost stickiness was found to have a negative effect on the relationship between unexpected earnings and buy-and-hold abnormal returns; the greater the cost stickiness, the less responsive the capital market were to earnings. We also found that financial analysts transmit earnings information concerning cost stickiness to investors, and in this manner the capital market's reaction to earnings are changed by cost stickiness information. Our results confirm and expand upon Weiss’(2010) findings that cost stickiness affects the accuracy of financial analysts’ earnings forecasts, their forecast range, and the market response to excess earnings.