Skip to main content

Product market competition and cost stickiness


Extant literature on cost stickiness has focused on how firm-specific characteristics affect the asymmetric cost behavior. In this paper, we explore how a firm’s operating environment affects the firm’s cost stickiness. Specifically, we examine the effect of product market competition on cost stickiness since a firm’s investment and cost retention decisions partly depend on how the firm interacts with its rival firms in the product markets. Using two firm-level text-based product market competition measures extracted from management disclosures in firms’ 10-K filings (Li et al. in J Account Res 51(2):399–436, 2013; Hoberg and Phillips in Rev Financ Stud 23(10):3773–3811, 2010; J Polit Econ, 2015), we find strong evidence consistent with cost asymmetry increasing in competition after controlling for known economic determinants of cost stickiness. In additional analyses, we also find that the effect of product market competition on the degree of cost stickiness increases in firms’ financial strength, likely because management in financially stronger firms has more resources for investment expenditures in spite of a sales fall. We also find that cost stickiness is increasing in competition if management is optimistic about future demand, whereas competition is not associated with cost asymmetry if management is pessimistic about future demand. Finally, we find that the relationship between competition and cost stickiness, although statistically insignificant at conventional levels, is more pronounced for single-segment firms relative to multi-segment firms.

This is a preview of subscription content, access via your institution.


  1. The investment concept in the real options literature encompasses a broad scope of the types of expenditures. Some of these expenditures may be in the form of capital expenditures, but under the current accounting standards many of these expenditures are treated as period costs including but not limited to research and development, advertisement, and costs incurred to improve product image, delivery services, or customer relations.

  2. Dixit and Pindyck (1994) and Trigeorgis (1996) provide summaries on the real options approach to investment under uncertainty.

  3. The LLM data is available from Professor Feng Li’s webpage at

  4. As Phillips (2013) points out in his discussion on Li et al. (2013), LLM is useful when researchers study firm specific managerial decisions related to managerial perceptions of competition, such as advertising or capital structure.

  5. Under the FIC, firms can be grouped into any number of industries based on product similarity. Hoberg and Phillips (2015) consider 50–800 industries in increments of 50. However, they focus on the classification of 300 industries (hereafter, FIC300) because the number of industries in three-digit SIC and four-digit NAICS is close to 300. We therefore use FIC300 when the FIC classification is used in the tests.

  6. Rauh and Sufi (2012) identify firms’ product market competitors listed in the 10-Ks and also find that SIC classifications do not accurately capture competitors.

  7. The FIC and THHI data are available from the Hoberg-Phillips Data Library at

  8. As discussed in the literature review, TNIC relaxes the membership transitivity property so that a firm may enter multiple product markets. As such, we use the FIC rather than TNIC industry classifications as industry dummies.

  9. We obtain the data on materials cost, wage, and oil price from the Federal Reserve Bank of St. Louis. Specifically, they are from the producer price index for crude materials, average hourly earnings of production and nonsupervisory employees, and crude oil prices databases, respectively.

  10. The import tariff data are available on Professor Peter K. Schott’s website at

  11. We limit the impact of a large tariff cut in the year of, as well as the two years following, the cut because moving away from the short event window will allow other factors to enter the equation. In order to ensure our results are not limited to the choice of the number of years impacted by the tariff cuts, we repeat our analysis using the year of, as well as the one year following, the cut and, alternatively, the year of, as well as the three years following, the cut. The coefficient on ΔlnSALE i,t  × DEC i,t  × COMP i,t remains negative and statistically significant at conventional levels.

  12. Since the data do not allow us to identify when in the year the tariff cut occurs, the impact of the tariff cut in the event year is ambiguous. As such, we reexamine the analysis by excluding the year of the tariff cut from the sample. The results are qualitatively similar.

  13. We determine the median value of each financial strength measure using the full sample. Therefore, the numbers of observations in the two sub-samples are not even.

  14. See Kim et al. (1998), Harford et al. (2003), and Mikkelson and Partch (2003), among others.

  15. In our first set of analyses, we limit our sample period to 1998 through 2009 due to change in segment reporting requirement under SFAS No. 131 which was issued in 1997. In sensitivity analyses, we include years 1996 and 1997 and the results are qualitatively similar.

  16. When we use the LLM sample, the p value (one-tailed) from the test of difference in coefficient on ΔlnSALE i,t  × DEC i,t  × COMP i,t is 0.47. When we use the THHI sample, the p value (one-tailed) from the test of difference in coefficient on ΔlnSALE i,t  × DEC i,t  × COMP i,t is 0.11, close to the conventional level of statistical significance.


  • Anderson M, Banker R, Janakiraman S (2003) Are selling, general, and administrative costs “sticky”? J Account Res 41(1):47–63

    Article  Google Scholar 

  • Balakrishnan R, Gruca T (2008) Cost stickiness and core competency: a note. Contemp Account Res 25(4):993–1006

    Article  Google Scholar 

  • Balakrishnan R, Petersen M, Soderstrom N (2004) Does capacity utilization affect the “stickiness” of cost? J Account Audit Finance 19(3):283–300

    Article  Google Scholar 

  • Banker R, Byzalov D, Chen L (2013) Employment protection legislation, adjustment costs and cross-country differences in cost behavior. J Account Econ 55(1):111–127

    Article  Google Scholar 

  • Banker R, Byzalov D, Ciftci M, Mashruwala R (2014) The moderating effect of prior sales changes on asymmetric cost behavior. J Manag Account Res 26(2):221–242

    Article  Google Scholar 

  • Bernard A, Jensen B, Schott P (2006) Trade costs, firms and productivity. J Monetary Econ 53(5):917–937

    Article  Google Scholar 

  • Chen C, Lu H, Sougiannis T (2012) The agency problem, corporate governance, and the asymmetric behavior of selling, general, and administrative costs. Contemp Account Res 29(1):252–282

    Article  Google Scholar 

  • Dierynck B, Landsman W, Renders A (2012) Do managerial incentives drive cost behavior? Evidence about the role of zero earnings benchmarks for labor cost behavior in private Belgian firm. Account Rev 87(4):1219–1246

    Article  Google Scholar 

  • Dixit A, Pindyck R (1994) Investment under uncertainty. Princeton University Press, Princeton

    Google Scholar 

  • Feenstra R (1996) U.S. imports, 1972–1994, data and concordances. NBER Working Paper 5515

  • Feenstra R, Romalis J, Schott P (2002) U.S. imports, exports and tariff data, 1989–2001. NBER Working Paper 9387

  • Feng S, Ho CY (2015) The real option approach to adoption or discontinuation of a management accounting innovation: the case of activity-based costing. Rev Quant Finance Account. doi:10.1007/s11156-015-0522-4

    Google Scholar 

  • Fresard L (2010) Financial strength and product market behavior: the real effects of corporate cash holdings. J Finance 65(3):1097–1122

    Article  Google Scholar 

  • Grenadier S (2002) Option exercise games: an application to the equilibrium investment strategies of firms. Rev Financ Stud 15(3):691–721

    Article  Google Scholar 

  • Hadlock C, Pierce J (2010) New evidence on measuring financial constraint: moving beyond the KZ index. Rev Financ Stud 23(5):1909–1940

    Article  Google Scholar 

  • Harford J, Mikkelson W, Partch M (2003) The effect of cash reserves on corporate investment and performance in industry downturns. Working paper

  • Hoberg G, Phillips G (2010) Product market synergies and competition in mergers and acquisitions: a test-based analysis. Rev Financ Stud 23(10):3773–3811

    Article  Google Scholar 

  • Hoberg G, Phillips G (2015) Text-based network industries and endogenous product differentiation. J Polit Econ. doi:10.2139/ssrn.1520062

  • Holzhacker M, Krishnan R, Mahlendorf M (2015) The impact of changes in regulation on cost behavior. Contemp Account Res 32(2):534–566

    Article  Google Scholar 

  • Kama I, Weiss D (2013) Do earnings targets and managerial incentives affect sticky costs? J Account Res 51(1):201–224

    Article  Google Scholar 

  • Kim C, Mauer D, Sherman A (1998) The determinants of corporate liquidity: theory and evidence. J Financ Quant Anal 33(3):335–359

    Article  Google Scholar 

  • Lee KJ, Shyu DS, Dai MJ (2009) The valuation of information technology investments by real options analysis. Rev Pac Basin Financ Mark Pol 12(4):611–628

    Article  Google Scholar 

  • Li F, Lundholm R, Minnis M (2013) A measure of competition based on 10-K filings. J Account Res 51(2):399–436

    Article  Google Scholar 

  • Martzoukos S (2001) Hysteresis models of investment with multiple uncertainties and exchange rate risk. Rev Quant Finance Account 16(3):251–268

    Article  Google Scholar 

  • McDonald R, Siegel D (1986) The value of waiting to invest. Q J Econ 101(4):707–728

    Article  Google Scholar 

  • Mikkelson W, Partch M (2003) Do persistent large cash reserves hinder performance? J Financ Quant Anal 38(2):275–294

    Article  Google Scholar 

  • Noreen E, Soderstrom N (1997) The accuracy of proportional cost models: evidence from hospital service departments. Rev Account Stud 2(1):89–114

    Article  Google Scholar 

  • Phillips G (2013) Discussion of a measure of competition based on 10-K filings. J Account Res 51(2):437–447

    Article  Google Scholar 

  • Pindyck R (1988) Irreversible investment, capacity choice, and the value of the firm. Am Econ Rev 78(5):969–985

    Google Scholar 

  • Rauh J, Sufi A (2012) Explaining corporate capital structure: product markets, leases, and asset similarity. Rev Finance 16(1):1–41

    Article  Google Scholar 

  • Schott P (2010) U.S. manufacturing exports and imports by SIC and NAICS category and partner country, 1972–2005. Working paper

  • Trigeorgis L (1996) Real options: managerial flexibility and strategy in resource allocation. MIT Press, Cambridge

    Google Scholar 

  • Whited T, Wu G (2006) Financial constraints risk. Rev Financ Stud 19(2):531–559

    Article  Google Scholar 

Download references


We are grateful to the editor Professor Cheng-Few Lee and two anonymous referees for insightful comments and suggestions which significantly improve the quality of this paper.

Author information

Authors and Affiliations


Corresponding author

Correspondence to Kenneth Zheng.



See Table 7.

Table 7 Variable definitions

Rights and permissions

Reprints and Permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Li, WL., Zheng, K. Product market competition and cost stickiness. Rev Quant Finan Acc 49, 283–313 (2017).

Download citation

  • Published:

  • Issue Date:

  • DOI:


JEL Classification