Do Financial Analysts Recognize Firms’ Cost Behavior?

This study explores whether financial analysts understand two aspects of cost behavior cost variability and cost stickiness. Since analysts’ understanding is not directly observable, we model the process of earnings prediction to generate empirically testable hypotheses regarding analysts’ comprehension of cost variability and cost stickiness. Empirical findings suggest that analysts make systematic errors in predicting both variable costs and sticky costs, which undermine their earnings forecasts and mislead investors. Overall, the results provide evidence that analysts understand firms’ cost behavior only to a limited extent.