CEO political ideology and asymmetric cost behavior

Abstract

We examine how CEO political ideology is associated with firms' resource adjustment decisions that give rise to asymmetric cost behavior, or “sticky costs.” Asymmetric cost behavior comes from resource adjustments firms make in response to sales increases and decreases. We argue that the conservative nature of Republican CEOs is manifest in them being more cautious and slower to react to sales declines. Furthermore, conservative individuals are more careful in making major life changes and are inclined towards maintaining the status quo. We provide empirical evidence that firms with Republican CEOs have more asymmetric costs than firms led by Democratic CEOs. We conduct several cross-sectional tests and find results suggesting greater cost asymmetry in firms with Republican CEOs when SG&A resources are more value enhancing. Our findings suggest that political ideology is a significant managerial characteristic associated with firms' cost behavior.