The managerial perception of uncertainty and cost elasticity

Abstract

Theoretical research demonstrates the important role of uncertainty in shaping a firm's cost elasticity. We contribute to this literature by analyzing the inherent tension between the effects of uncertainty about unit contribution margin (CM) and sales volume on cost elasticity. We identify the occurrence of words implying uncertainty in managerial forward-looking statements and employ a novel methodology to construct distinct measures of the managerial perceptions of overall, unit CM, and volume uncertainty. We find a significantly positive (negative) association between the uncertainty about unit CM (volume) and cost elasticity. These associations vary predictably with firm and industry characteristics. Our empirical evidence supports the theoretical argument that managerial perceptions of uncertainty and its components differentially influence their resource allocation decisions and suggests that any analysis of the relation between uncertainty and a firm's cost elasticity should specify the type of uncertainty as well as the firm and industry characteristics.