Do government subsidies reinforce the cost stickiness of strategic emerging industries?

NAN Xiaoli1 ZHANG Min1

(1.Faculty of Management and Economics, Dalian University of Technology, Liaoning, China 116024)

【Abstract】Traditional models of cost behaviors posit a linear correlation between activities and costs. In short run, total costs equal fixed costs plus unit variable costs multiply by the activities volume. Thanks to the model’s ubiquity, it is of considerable interest to examine the validity of this simple specification. Researchers have examined how complexity (Anderson, 1995; Banker, et al., 1990) and congestion (Gupta, et al., 2006) affect the shape of the cost curve. Anderson, Banker and Janakiraman (2003) suggested differential slopes based on whether activities are increasing or decreasing. Because the slope is smaller when activities decrease, costs are said to be sticky. Cost stickiness, or asymmetric cost behaviors, refers to the observation that the costs of an enterprise increase more when the volume of business increases than when the volume of business declines, which reflects enterprise risks under the fluctuation of macro-economic caused by resource redundancy or resource misallocation. Furthermore, previous studies believed that cost stickiness can be attributed to three reasons, including adjustment costs, management optimistic expectations, and management agency problems (Banker, et al., 2013). Following the literature of cost stickiness, we explore the determinants of cost behaviors in the context of government subsidies. In this paper, we choose the listed companies in Chinese strategic emerging industries between 2007 and 2016 to explore the effect and the mechanism of government subsidies on the cost stickiness. Drawing on the ABJ (2003) model, it is found that government subsidies have a positive impact on sticky costs, which persists even after the self-selection. Besides, the relationship between government subsidies and cost stickiness is more obvious under the low financing constraints, and there is no significant change in the continuous decline of operating income. It shows that government subsidies could enhance cost stickiness through management agency problems. There is no evidence to support the viewpoint of adjustment costs and management optimistic expectations. Especially, using cost rate of sales revenue and over-investment to measure management agency problems, the result of intermediary effects supports the view that government subsidies reinforce cost stickiness through management agency problems. In a further analysis, we compare the impact of government subsidies on cost stickiness in different companies and industries so as to reveal the mechanism. The results show that government subsidies increasing the degree of cost stickiness through management agency problems are mainly reflected in state-owned enterprises. The conclusion not only enriches the theoretical research on factors that influence strategic emerging industries’ cost stickiness, but also provides a new way for the study of government subsidies’ economic consequences.

【Keywords】 government subsidy; cost stickiness; strategic emerging industries; agency problem;

【DOI】

【Funds】 China Postdoctoral Science Foundation (2015M580232) Project of Social Science Planning of Liaoning Province (L15CGL018) General Project of Liaoning Provincial Federation Social Science Circles (2018lslktyb-019)

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    Footnote

    [1]. ① We appreciate anonymous reviewers for their suggestions and comments. This paper expands the sample period to 2007–2016. At the same time, various variables and their two-order and third-order interaction terms are included in the regression model, and fixed effects at the enterprise level are controlled. [^Back]

    [2]. ① Due to the limited space, descriptive statistical results and correlation analysis are not listed in this paper. Tables 1–8 do not report first-order coefficients and regression results of fixed effects at the enterprise level. [^Back]

    [3]. ② For operating costs, log(REVi,t / REVi,t−1) is 1.014 and log (REVi,t / REVi,t−1) × Dec is −0.060, which are significant at the level of 1%. That is to say, as operating income increases by 1%, the costs increase by 1.014%, while as operating income decreases by 1%, the costs decrease by 0.954%, which is consistent with the results of Xie et al. (2014). For selling, general and administrative costs, log(REVi,t / REVi,t−1) is 0.622 and log(REVi,t / REVi,t−1) × Dec is −0.331, and significant at the level of 1%, which is consistent with the conclusions of Chen et al. (2011). To sum up, listed companies in China’s strategic emerging industries have cost stickiness. [^Back]

    [4]. ① We appreciate the comments and suggestions from reviewers. This paper analyzes the cause of cost stickiness of listed companies in strategic emerging industries from three perspectives, including adjustment costs, management optimistic expectations, and management agency problems. [^Back]

    [5]. ① Due to the limited space, the above robustness test results are not listed, yet available upon request. [^Back]

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This Article

ISSN:1001-9952

CN: 31-1012/F

Vol 44, No. 08, Pages 114-127

August 2018

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Article Outline

Abstract

  • 1 Introduction
  • 2 Theoretical background and research hypothesis
  • 3 Research design
  • 4 Empirical results and analyses
  • 5 Further analyses
  • 6 Conclusions and implications
  • Footnote

    References