Risk Management in Product Diversification: The Role of Managerial Overconfidence in Cost Stickiness—Evidence from Iran

Mona Parsaei (), Davood Askarany, Mahtab Maleki and Ali Rahmani
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Mona Parsaei: Department of Accounting, Faculty of Social Sciences and Economics, Alzahra University, Tehran 19938 93973, Iran
Davood Askarany: Department of Accounting and Finance, Business School, University of Auckland, Auckland 1010, New Zealand
Mahtab Maleki: Department of Accounting, Faculty of Social Sciences and Economics, Alzahra University, Tehran 19938 93973, Iran
Ali Rahmani: Department of Accounting, Faculty of Social Sciences and Economics, Alzahra University, Tehran 19938 93973, Iran

Risks, 2024, vol. 12, issue 10, 1-21

Abstract: Purpose: This study investigates the relationship between product diversification strategy and cost stickiness, focusing on managerial overconfidence as a moderating factor. It aims to address a critical gap in the literature by providing empirical insights grounded in the Resource-Based View (RBV) theory, specifically examining firms listed on the Tehran Stock Exchange. Methodology: Utilizing a sample of 149 companies from the Tehran Stock Exchange in Iran spanning from 2015 to 2021, this study tests two hypotheses: (1) a positive relationship between product diversification and cost stickiness and (2) the amplification of this relationship by managerial overconfidence. Product diversification is quantified using the Herfindahl Index, while managerial overconfidence is measured through an investment-based index derived from capital expenditures. Cost stickiness is assessed by analysing the asymmetric behaviour of costs in response to changes in sales, focusing on how costs tend to remain high even when sales decrease. Findings: The empirical results substantiate both hypotheses, demonstrating a significant positive relationship between product diversification strategy and cost stickiness. Furthermore, managerial overconfidence amplifies this relationship, highlighting the role of internal resources and managerial perceptions in shaping cost behaviour. Originality: This study contributes substantially to the literature by being among the first to empirically examine the interplay between product diversification strategy, cost stickiness, and managerial overconfidence. Extending the RBV theory to cost behaviour and strategic management provides novel insights for scholars and practitioners in entrepreneurship, corporate strategy, and organizational behaviour. The findings underscore the importance of strategic choices and managerial traits in determining cost stickiness, offering valuable implications for financial analysts, auditors, and stakeholders.

Keywords: product diversification strategy; organizational flexibility; cost behaviour; decision making; cost stickiness; managerial overconfidence; risk (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2024
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