The Effect of Agency Theory upon Cost Stickiness

Abstract

The main purpose of the research was to examine the effect of agency problem on cost stickiness, the results revealed that cost exhibits an asymmetric behavior which contradicts the traditional cost assumption, further, agency theory plays a vital role in determining the asymmetric cost behavior through two drivers; empire building incentives that make managers increasing the acquisition of resources when demand increases and keeping unused resources when demand drops in order to chaise their personal benefits resulting in cost stickiness, also, earnings management incentives that make managers delaying the acquisition of needed resources when demand increases and cutting unused resources aggressively when demand declines in order to meet earnings target resulting in a lower degree of cost stickiness