The impact of cost stickiness on financial reporting: evidence from income smoothing

This study investigates the impact of cost stickiness on income smoothing. Prior literature at intersection between management and financial accounting has understood changes in behaviour as mere consequences short-term earnings incentives. By considering smoothing more complex strategy, we argue that resource adjustment strategies underlying might also have an long-term reporting choices. Specifically, asymmetric reactions costs to sales should increase volatility thus restrict managers’ capabilities report smooth streams, which is supported by our empirical results. Additional tests reveal primarily restricts opportunistic relationship depends other factors such level costs.