(The) impact of CEO contractual protection on asymmetric cost behavior

Abstract

This study examines whether executives’ contractual protection, in the form of employment agreements, and standalone severance pay agreements, affects asymmetric sensitivity of costs to activity (i.e., “cost stickiness). I hypothesize that firms with CEO contractual protection will have the less extent of cost stickiness than other firms. Consistent with the prediction, I find that CEO protection is negatively associated with the degree of cost stickiness. Moreover, I confirm that the effect of CEO contractual protection on sticky cost behavior is valid even when CEO protection is stratified. Overall, these findings suggest that CEO contractual protection significantly affects firms’ cost behaviors.