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Chen, Clara Xiaoling; Gores, Timo; Nasev, Julia (January 2013): Managerial Overconfidence and Cost Stickiness. SSRN : Social Science Research Network
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We propose managerial overconfidence as a behavioral explanation for SG&A cost stickiness. Building on the psychology literature, we predict that overconfident managers are more likely to overestimate future demand and therefore less likely to cut SG&A costs when sales decline. Using a sample of 14,568 S&P 1500 firm-years between 1992 and 2011, we document that SG&A cost stickiness increases in the degree of CEO overconfidence. We address key alternative explanations and document that our results are robust to different measures of managerial overconfidence and different model specifications. By focusing on a managerial characteristic, our results provide strong support for the role of managerial discretion in cost management.