Cost stickiness behavior and environmental uncertainty in different strategies: Evidence from Southeast Asia

Abstract

Managers consider environmental uncertainty in making decisions. Accordingly, this study aims to test the positive effect of environmental uncertainty on cost stickiness. This study also investigates the effects of environmental uncertainty on cost stickiness under different strategies. Further, firms need more able managers to deal with uncertain environments. This study observes the different effects of environmental uncertainty on cost stickiness when managers have varying levels of managerial ability. We run the panel regression analysis of 23,298 firm-year observations in Southeast Asian countries in 2013–2019. This study documents that environmental uncertainty increases cost stickiness, and the effects are qualitatively similar for prospector and defender strategies. Further, the effect of environmental uncertainty on cost stickiness is stronger in firms with low managerial ability for both the prospector and defender strategies. Greater environmental uncertainty increases cost stickiness (ratio of SG&A to sales). This increase can be interpreted as a negative signal for future profits and a positive signal that firms retain resources to meet future sales expectations. Managerial ability affects cost stickiness. Hence, less managerial ability strengthens the relationship between environmental uncertainty and cost stickiness. This study operationalizes environmental uncertainty using three dimensions: munificence, dynamism, and complexity, which are arguably more comprehensive than prior studies that only use a single uncertainty dimension. This study also adds strategy and managerial ability to the relationship between environmental uncertainty and cost behavior. It demonstrates that firms deal with uncertainty based on their competitive advantage and managerial capabilities. This study documents the cost behavior of Southeast Asian.