M.A. Thesis:

The Confounding Effect of Cost Stickiness on the Association between Managerial Ownership and Conditional Conservatism

Bad news about profit is reflected faster than good news and this is because of conservatism, in fact conservatism by rapid recognition of bad news in comparison to good news results in the decrease of profit and revenue, however this asymmetric relationship can emerge from other sources such as cost stickiness. Cost stickiness is the asymmetric response of costs at the time of sale increase in comparison to sale decreases, in other words the decrease of profit and revenue might be the result of cost stickiness. Both cost stickiness and conditional conservatism exist simultaneously and cost stickiness results in false estimation of conditional conservatism in models; so in order not to violate the output, cost stickiness should be controlled in conservatism models. Since management ownership considers managers compeer to stockholders who are motivated and benefactors, this might lead to cost stickiness decrease. In models this effect can cause possible mistakes in conditional conservatism. So it’s highly probable that these models estimate a high correlation between management ownership and conservatism. To this end the present study focused on the manipulating effect of cost stickiness on management ownership and conditional conservatism based on the data collected from 133 accepted firms in Tehran stock exchange from 1389 to 1393. The results of the present study showed the strong response of profit (loss) to negative news in comparison to positive news. The results also showed that part of the asymmetric timing model of profit is due to the cost stickiness, and by controlling its effects, conditional conservatism might decrease. Yet there is no meaningful correlation between conditional conservatism and management ownership.

Keywords: conservatism, cost stickiness, management ownership