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The Effect of Earnings-Target Incentive Compensation on Cost Stickiness Behaviour: Evidence from Indonesian Listed Manufacturing Companies

Tami Zagita and Hilda Rossieta

Pertanika Journal of Tropical Agricultural Science, Volume 27, Issue S2, December 2019

Keywords: Cost stickiness behaviour, cost efficient behaviour, empire building motive, earnings-target incentive compensation system

Published on: 11 November 2019

The phenomenon in contrast to the traditional cost accounting theory, assuming cost efficiency as the primary objective, is called cost stickiness behaviour. Under the cost stickiness phenomenon, the increase of cost during a revenue-increasing trend is more significant than the decrease in cost during a revenue-decreasing trend (Anderson et al., 2003). This study investigates whether listed manufacturing companies in Indonesia practice cost stickiness behaviour. This study also examines specific circumstances stopping managers from adopting such behaviour and exercising a cost-efficient policy instead. This study hypothesises that generally, managers’ practice cost stickiness behaviour to enjoy a double benefit. However, when a level of earning is critical near to losses, managers choose to practice traditional efficient-cost behaviour and cease building a business empire through a cost stickiness policy. Using a sample of 123 manufacturing companies listed in the Indonesian Stock Exchange from 2009 to 2015, empirical models representing the hypotheses were formulated and tested using a linear regression statistic technique. The test delivers empirical evidence consistent with the hypotheses provided. The empirical results also agree with findings regarding the effect of agency-driven incentives, including earnings-target incentive compensation on cost stickiness behaviour.

ISSN 1511-3701

e-ISSN 2231-8542

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