Managers' Equity Incentives and Asymmetric Cost Behavior

Recent research documents the phenomenon of asymmetric cost behavior where the cost structure of the firm changes differently in response to an increase in sales than to a decrease in sales and attributes this behavior to deliberate decisions made by managers that face adjustment costs. In this paper, we test the relationship between asymmetric cost behavior and equity incentives that are known to impact managerial decision making. We find that a measure of the sensitivity of managerial wealth to stock price (delta) is positively related to sticky costs where costs increase more quickly in response to a sales increase than they decline in response to a sales decrease. Conversely, we find that a measure of the sensitivity of managerial wealth to stock volatility (vega) is positively related to anti-sticky costs where costs increase to a lesser extent in response to a sales increase than they decline in response to a sales decrease. These results indicate the importance that equity incentives have on managerial resource adjustment decisions in response to changes in firm activity levels.