The effect of management control mechanisms through risk-taking incentives on asymmetric cost behavior

Wulung Li, Ramachandran Natarajan, Yan Zhao and Kenneth Zheng ()
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Wulung Li: Texas A&M International University
Ramachandran Natarajan: University of Texas at Dallas
Yan Zhao: Texas A&M International University
Kenneth Zheng: University of Wyoming

Review of Quantitative Finance and Accounting, 2021, vol. 56, issue 1, No 8, 219-243

Abstract: Abstract We investigate the relationship between management control mechanisms, specifically risk-taking incentives targeted at mitigating moral hazard, and cost behavior during periods of sales declines relative to periods of sales growth. We find that incentive vega of both chief executive officers and top five paid executives is associated with expedited reductions in selling, general, and administrative cost in periods of sales declines. These results are consistent with the Sedatole et al. (J Account Res 50(2):553–592, 2012) finding that incentive vega induces managers to adopt a more elastic cost structure, presumably because managerial operational decisions, particularly outsourcing, increase firms’ total risk. We conduct an additional analysis to rule out an alternative explanation that the expedited cost cuts may be driven by incentives to manage earnings. Finally, our results are robust to alternative measures of risk-taking incentives. Overall, our findings support the view that management control mechanisms through risk-taking incentives are an important determinant of management cost adjustment decisions in periods of demand declines relative to periods of demand growth.

Keywords: Risk-taking incentives; Demand uncertainty; Cost behavior; Cost stickiness; Cost elasticity (search for similar items in EconPapers)
JEL-codes: D22 D25 D81 M41 M52 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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DOI: 10.1007/s11156-020-00891-z

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