Do Zombie Firms Display the Sticky Costs’ Phenomenon?

Abstract

Traditional cost accounting theory found in cost accounting textbooks states that sales volume increases or decreases result in changes in costs of a symmetric nature meaning the cost change for a sales increase is the same magnitude as for a sales decrease. Initial tests of this theory finds that cost changes are not symmetric when examining selling, general, and administrative (SGA) costs. Sales revenue decreases result in a smaller change in SGA costs than when sales revenue increases (i.e., sticky costs or cost stickiness). More recent research finds a decline in the cost stickiness in the U.S. and explains this decline by examining firms’ cost structure without examining the firms’ characteristics. This study examines a specific firm characteristic by classifying firms into zombie and non-zombie categories. This classification process and then testing for cost stickiness results in zombie firms displaying no significant cost stickiness whereas nonzombie firms exhibit cost stickiness. Also, zombie firms possess weaker key financial indicators suggesting that financial weakness is negatively associated with the sticky cost behavior.