STICKY COSTS AND ZOMBIE FIRMS: A UNIQUE APPROACH TO EXPLAINING DECLINING COST STICKINESS

Abstract

This research paper investigates the phenomenon of "sticky cost behavior" among firms in response to changes in their revenue, specifically focusing on the decline of such behavior in US public companies and examining the impact of the increased presence of "zombie firms" in the economy. Sticky cost behavior refers to the asymmetric cost changes for a sales increase or decrease in traditional cost accounting theory. Recent research studies have found that when examining selling, general, and administrative (SGA) costs, sales revenue decreases result in a smaller change in SGA costs than when sales revenue increases. The study finds that zombie firms exhibit no significant cost stickiness, while non-zombie firms exhibit cost stickiness, leading to the conclusion that zombie firms' debt and related debt servicing costs constrain their ability to compete with non-zombie firms when facing similar circumstances of declining revenue. The sample is drawn from Compustat’s annual combined industrial data bases spanning from 1997 to 2016, and the final sample consists of 18,851 firms over the 2006-2016 period. Results indicate that zombie firms are less likely to maintain SGA costs when revenues decline. This research paper is significant because prior studies examining the decline of the sticky cost phenomenon have focused on changes in cost structure and not on the changes in the firms’ characteristics