Do Management Revenue Forecasts Explain the Asymmetrical Behavior of Operating Costs

Prior research studies cost asymmetry as a consequence of managers’ response to an actual change in sales. However, it is not clear how managers alter cost structure when managers forecast a decrease in revenue. Using management revenue forecasts in Japan, where firms mandatorily disclose and revise management forecasts during the fiscal year, we examine the impact of management revenue forecasts on asymmetric cost behavior. We find that ex ante management revenue forecasts have a substantial impact on the degree of cost stickiness. Further, we find that initial management forecasts have a greater impact on determining firms’ cost structure than revised ones, consistent with the notion that managers are subject to potentially large adjustment costs related to resource capacity. Finally, we find the degree to which managers’ favorable expectations of future demand increase cost asymmetry is greater when managers are likely to have more discretion in retaining slack resources.