Cost behavior, ownership types, and managerial ability

When firms need more resources to meet increasing demand, they usually add more resources. However, when demand declines, will firms reduce idle resources to respond to the decline? The answer is yes, but the reduction will often not be equivalent to the increase. As suggested by recent accounting studies, increasing resources is easy, but firms often find it difficult to remove idle resources for various reasons.
The first two studies in this dissertation analyze this phenomenon called “cost stickiness” in the context of SOEs (state-owned enterprises) and family firms. SOEs are arguably less willing to reduce costs when sales decline because they also pursue socio-political objectives. When demand declines, governments may instruct SOEs not to lay off employees or to reduce compensation. Meanwhile, blood is thicker than water. Family firms often prioritize socioemotional wealth, which withholds them from reducing their resources when sales decline. The results reported in this PhD thesis are consistent with the idea that cost stickiness is more pronounced in listed firms with these types of ownership than in listed firms where either the state or a family owns a considerable stake of the firms’ shares.
This dissertation also shows that managing cost-efficient firms helps increase better able managers’ performance further. While managerial ability usually leads to increasing sales, this is in itself not sufficient to enhance performance because firms need to increase costs to meet increased sales. In this respect, better able managers who manage cost-efficient increase firm performance more because they can add fewer resources.