Asymmetric Cost Behavior and Analyst Earnings Forecasts Revisited: Evidence from a New Firm-year Measure of Cost Stickiness

This study introduces a new firm-year measure of cost stickiness. This new measure, which is based on cross-sectional regressions of changes in cost on changes in sales, is benchmarked against the quarterly firm-level measure developed in Weiss (2010). The results show that the new measure is subject to fewer data restrictions and therefore results in larger sample sizes. Like the Weiss (2010) measure, the new measure is positively correlated with analysts’ forecast accuracy (higher levels of cost stickiness are associated with larger absolute forecast errors) and increases the effect of earnings surprises on market reactions (lower levels of cost stickiness are associated with stronger market reactions). In line with economic theory (Bhushan, 1989; Das et al., 1998), the new measure exhibits a negative correlation with analyst coverage (higher levels of cost stickiness are associated with higher analyst coverage), indicating that analysts meet the enhanced demand for private information that results from less predictable earnings.