The determinants of cost stickiness in family firms: evidence from the United States

Chen, Li-Yu (2022) The determinants of cost stickiness in family firms: evidence from the United States. PhD thesis, University of Glasgow.

Abstract

This thesis comprises an empirical review of the cost asymmetric behaviour and two empirical studies on cost structures in family-type organisations.

In this thesis, I first introduce cost asymmetric behaviour and review the relevant literature in Chapter 2. Scholars refer to the phenomenon of cost asymmetric behaviour as “cost stickiness”. This chapter includes the evidence for cost stickiness and the significant critical determinants that impact the degree of cost stickiness.

In two empirical studies in Chapters 3 and 4, I explore the cost stickiness in firms based on the unique characteristics and culture of a family type of organisational structure. Because of greater alignment of owner-manager incentives, higher accounting conservatism, and being more risk-averse, research on family firms has shown that founding family firms have fewer agency problems between owners and managers than non-family firms (Shleifer and Vishny 1997; Villalonga and Amit 2006; Anderson and Reeb 2003b; Chen et al. 2010). This context provides an interesting case for examining how managerial choices in family firms can adjust resources to influence family firms’ cost structure and stickiness.

Chapter 3 investigates the effects of different agency problems on selling general and administrative (SG&A) cost stickiness in family and non-family firms based on the unique characteristics and culture of family firms. I use four measures of agency problems arising from CEOs’ incentives, including free cash flow, CEO tenure of the first three years, CEO tenure of the final year, and the percentage of fixed pay in the CEO’s total compensation. In additional tests, I examine the role of corporate governance in moderating to mitigate the effect of the agency problem on SG&A asymmetrical cost.

As managers in family firms face different incentives, I conjecture that they are more likely to avoid rapidly increasing or slowly decreasing SG&A costs when sales grow or decline, respectively, compared with non-family firms. The interests of managers in family firms align with those of the owners, and that effective monitoring by the board lessens managerial empire-building incentives. Therefore, reducing agency problems of separation of ownership and control in family firms decreases the degree of cost stickiness.

The results show that, compared with non-family firms, a higher free cash flow does not lessen the degree of SG&A cost stickiness in family firms. Compared with non-family firms, CEOs in the first three years of tenure are more likely to exhibit higher SG&A cost stickiness in family firms. However, CEOs in the final year of tenure are less likely to exhibit the SG&A cost stickiness in family firms. The degree of cost stickiness is more pronounced in non-family firms than in family firms when considering the CEO fixed pay percentage.

Chapter 4 examines the relationship between another characteristic of family firms, risk aversion, and cost stickiness. Current literature in family firms shows that family firms are risk-averse and conservative regarding the innovative behaviour of pursuing entrepreneurial strategies compared to non-family firms (Duran et al. 2015; Jones, Makri, and Gomez–Mejia 2008; Nordqvist and Melin 2010). Family firms are often reluctant to invest in new ventures and unwilling to develop, grow, take advantage of opportunities and take risks (Habbershon and Pistrui 2002; Cabrera-Suárez, De Saá-Pérez, and García-Almeida 2001; Hall, Melin, and Nordqvist 2001). I consider five measures of risk aversion: family ownership, founder-CEO duality, CEO gender, risk tone disclosure in 10-K, frequency of management earnings guidance, and idiosyncratic risk. I also investigate the moderating role of financial constraints in firms that make family firms more risk-averse to take innovation opportunities and affect SG&A cost behaviour.

The results show that higher ownership decreases the degree of cost stickiness in the active family firms and cost anti-stickiness in pooled and passive family firms. When founder-CEOs are in the active family firms, cost stickiness decreases. Female CEOs also decrease the degree of cost sticky behaviour. The more risk-averse content in risk tone disclosures from pooled family firms, the more they show cost anti-stickiness behaviour. Furthermore, the degree of cost stickiness behaviour in passive and pooled family firms is negatively associated with how frequently the company issues more management earnings guidance.

The two empirical studies contribute to both management and financial accounting literature. This thesis extends the cost behaviour literature by investigating how cost management decisions are related to managers’ incentives, stakeholders, and organisational culture and structure. This thesis has implications for management accountants, firm management, auditors, and analysts. They might be interested in understanding the behaviour of their expense activities (for example, when generating financial forecasts) and gaining awareness of how managers make accounting decisions to adjust their costs within a family-type governance structure in the United States.

• Item Type: Thesis (PhD)
• Qualification Level: Doctoral
• Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
• Colleges/Schools: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Supervisor's Name: Aleksanyan, Dr. Mark and Wu, Dr. Betty
• Date of Award: 2022
• Depositing User: Theses Team
• Unique ID: glathesis:2022-83034
• Copyright: Copyright of this thesis is held by the author.
• Date Deposited: 22 Jul 2022 14:12
• Last Modified: 22 Jul 2022 14:17
• Thesis DOI: 10.5525/gla.thesis.83034
• URI: https://theses.gla.ac.uk/id/eprint/83034