| Abstract: |
Understanding cost behavior, that is, the manner in which the cost structure of a firm is affected by changes in its business activity, is essential for gaining insights into the financial performance of firms. Anderson, Banker, and Janakiraman (2003) argue that the intentional nature of resource adjustment may generate asymmetric cost behavior, and demonstrate that costs are sticky on average. That is, costs tend to increase more when revenues rise than to decrease when revenues fall by an equivalent amount. This study investigates whether family ownership affects selling, general and administrative cost behavior.
Family firms are an important part of the global economy. According to the Family Firm Institute (2008), family businesses generate an estimated 70–90% of global gross domestic profit annually. Furthermore, such firms firms have unique characteristics that may affect the manner in which their cost structure responds to changes in business activity, namely, fewer owner–manager agency problems than non-family firms, strong motivation to preserve the long-term prosperity of the firm and less focus on short-term profitability. These features are expected to decrease cost stickiness of family firms.
The empirical analysis uses a sample of all firms listed on the Tel-Aviv Stock Exchange in the years 2006–2015. Israeli firms provide a good setting for an empirical examination of the effects of family ownership because they are mandated to report explicitly family relationships among all stakeholders, directors, and managers as an integral part of the annual financial statements they file. We meause stickiness using the standard regression introduced in Anderson, Banker, and Janakiraman (2003). Estimation results indicate that family firms exhibit anti-sticky cost behavior, as opposed to non-family firms that demonstrate cost stickiness. That is, their costs tend to increase less when revenues rise than to decrease when revenues fall by an equivalent amount. This result is robust to alternative definitions of family firms. The results are also preserved for a subsample of firms that switched ownership status (i.e., from family owned to non-family owned and vice versa). Further inquiry reveals that anti-sticky cost behavior is focused in family firms with active family involvement, that is, where the family member serves as an officer or chairperson of the firm. Finally, we test the effect of other known determinants of asymmetric cost behavior and find that managers’ optimism mitigates anti-sticky cost behavior and that successive sales decrease does not affect this behavior. |