Are costs really sticky? Evidence from publicly listed companies in the UAE

Abstract

This article measures the degree of adjustment between operating revenues and costs for publicly listed companies in the United Arab Emirates (UAE). Traditional cost models assume that variable costs change proportionally in response to an upward or downward fluctuation in demand. However, in recent years, such an assumption has been questioned by a variety of papers from the economics and accounting fields. Typically, cost stickiness is defined as costs decreasing by less than 1% when sales decrease by 1%, while reacting closer to the proportion of change when sales increase. This study, unlike the vast majority of the literature, did not find cost stickiness in the UAE after using panel data regression analysis. The main explanation is that UAE has mostly expatriate labour force that does not have the typical benefits of employment protection legislation (EPL) available in other national jurisdictions. EPL is a main reason that costs adjustments during decreasing sales is curbed due to the associated costs of firing employees.

Keywords:

• cost stickiness
• employment protection legislation
• United Arab Emirates
• expatriates

JEL Classification:

• J83
• M40
• D21

Acknowledgements

The authors gratefully acknowledge many helpful comments and suggestions from William Lim, Youan Robert Lin, Ngan Cao, Federico Carril, participants in the 2013 Eurasia Business and Economics Society (Yekaterinburg), 7^th Asian Business Research Conference (Singapore) and the 2^nd Asia-Pacific Conference on Global Business, Economics, Finance and Social Sciences (Da Nang). The authors also thank the editor and an anonymous referee for their comments. The usual disclaimer applies.

Notes

¹ $1>\left[\frac{SG{A}_{i,t}}{SALES{ }_{i,t}}-\frac{SGA{ }_{i,t-1}}{SALES{ }_{i,t-1}}\right]$