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Does Demand Uncertainty Moderate the Relationship of Risk Attitude and Sticky Cost? Evidence From Egypt

Ahmed M. Abdelhamid

International Journal of Financial Research, 2021, vol. 12, issue 3, 356-369

Abstract: The current paper explores the relation between managers¡¯ risk attitude and cost stickiness behavior and the role of demand uncertainty as a moderation variable in the Egyptian business environment. Managers¡¯ risk attitudes are measured using Bo and Sterken (2007) proxy measure [Bo, H., & Sterken, E. (2007). Attitude towards risk, uncertainty, and fixed investment. The North American Journal of Economics and Finance, 18(1), 59¨C75]. Demand uncertainty is measured by the standard deviation of firms¡¯ sales over the sample period. The study sample includes 114 Egyptian-listed firms over a 14-year period (2004 - 2017) which results in 1,419 firm-year observations. The study models are estimated using the ordinary least squares (OLS) with a fixed-effects model. Findings show that in the presence of high demand uncertainty, risk-averse managers respond to sales decrease by cutting resources which lowers cost stickiness. One of the limitations is that some factors like firms¡¯ policies, corporate governance mechanisms, and board of directors¡¯ characteristics could dilute the effect of manager¡¯s risk attitude on cost stickiness. The current research emphasizes the importance of considering the firm¡¯s operating environment when selecting a manager for the firm, and the role of directed training to align the manager¡¯s personal characteristics with the firm's objectives. The current research contributes to the previous literature by documenting the effect of manager¡¯s risk attitude on cost stickiness and the role of a firm¡¯s demand uncertainty as a moderating variable between these two variables.

Keywords: sticky cost; risk attitude; demand uncertainty; Egyptian firms; cost behavior (search for similar items in EconPapers)
Date: 2021
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DOI: 10.5430/ijfr.v12n3p356

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Handle: RePEc:jfr:ijfr11:v:12:y:2021:i:3:p:356-369