Hidden in the Average: When Cost Stickiness Varies with Economic Growth
This study of Vietnamese non-financial firms reveals that while selling expenses appear symmetric on average, their stickiness actually varies systematically with economic growth, as stronger macroeconomic conditions lead firms to perceive sales declines as less persistent and thus adjust costs less aggressively.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
Every business faces a fundamental choice when its sales drop: should it immediately cut back on the resources it uses to sell and run its operations, or should it hold on, hoping the downturn is temporary? This decision is rarely simple. Hiring and firing workers, closing distribution channels, or breaking contracts all carry real costs and can disrupt a company's ability to function if things pick up again. Economists call the tendency to keep these resources even when sales fall "cost stickiness." It is the idea that costs do not fall as quickly as sales do, because managers are often reluctant to pull the plug on a business they believe will recover. For decades, researchers have tried to measure this stickiness by looking at the average behavior of companies over time, assuming that the pattern of cutting costs is roughly the same whether the economy is booming or struggling.
However, a new study suggests that this average view might be hiding a crucial detail. The researchers, based at the Industrial University of Ho Chi Minh City, argue that the information a sales decline sends to a manager depends entirely on the health of the broader economy. If a company's sales drop while the rest of the country is growing strongly, that drop might look like a temporary glitch, encouraging the manager to keep their staff and resources ready for the inevitable rebound. But if the same drop happens while the economy is already weak, it might signal a deeper, more permanent problem, prompting a faster and deeper cut in spending. By treating all these different situations as one big average, earlier studies may have missed how sensitive these decisions really are to the economic climate.
To investigate this, the team examined nearly six thousand company-years of data from non-financial firms listed on the stock exchanges in Ho Chi Minh City and Hanoi between 2015 and 2025. Vietnam offers a unique window into this behavior because its accounting rules require companies to list their selling expenses and administrative expenses separately, rather than lumping them together into a single category. This separation allowed the researchers to see if different types of costs reacted differently to sales changes. They focused specifically on how selling expenses—costs related to marketing, distribution, and sales staff—responded when sales went up versus when they went down, and how that response changed depending on the country's real economic growth rate.
The results revealed a striking contrast between what the average numbers suggested and what happened when the economic context was taken into account. When the researchers looked at the raw average, selling expenses appeared to be remarkably symmetrical; they seemed to rise and fall with sales in a nearly identical way, showing almost no sign of the expected "stickiness." In fact, across many different ways of testing the data, the average measure of stickiness for selling expenses was close to zero and unstable. This would normally lead a researcher to conclude that managers are cutting selling costs just as fast as they are raising them when sales drop.
But when the researchers allowed the data to speak differently based on the strength of the economy, a clear pattern emerged. They found that in years when the Vietnamese economy was growing strongly, a drop in a company's sales led to a much smaller cut in selling expenses. Managers were holding back on cutting costs, likely because the strong national growth suggested their sales drop was temporary and they needed to be ready to scale up again soon. Conversely, when economic growth was weaker, the same drop in sales triggered a much sharper reduction in selling expenses. The data showed that for every percentage point increase in the country's economic growth, the sensitivity of selling costs to a sales decline decreased significantly. This means that in a booming economy, managers are far more willing to keep their sales resources intact, even when their own numbers are down.
This finding challenges the idea that cost stickiness is a fixed trait of a company or an industry. Instead, it suggests that the decision to keep or cut resources is a dynamic response to the information carried by the macroeconomic environment. The study also addressed a potential confusion: could this pattern simply be because selling expenses are inherently different from administrative expenses, like office rent or salaries? To test this, the researchers compared the two types of expenses using the exact same set of companies and years. They found that while the average behavior of selling expenses looked different from administrative expenses, once the economic growth factor was included, both types of costs showed a similar pattern of reacting to the economic climate. The apparent difference was not because one type of cost was naturally more sensitive to growth, but because the average calculation had smoothed over the state-dependent behavior that was actually happening.
The researchers were careful to rule out other explanations, such as general price inflation, which could make costs look higher or lower without any real change in activity. Even after adjusting for inflation and testing different statistical methods, the link between strong economic growth and the reluctance to cut selling costs remained robust. The study does not claim to know exactly what is happening inside the minds of every manager, but it provides strong evidence that the economic environment changes the signal a sales decline sends. A decline in a strong economy is treated as a pause; a decline in a weak economy is treated as a warning.
Ultimately, this research suggests that looking at the average behavior of costs can be misleading. A coefficient near zero, which might suggest that costs are perfectly flexible and symmetric, can actually be the result of two opposing forces canceling each other out: a strong tendency to hold on to resources during good times, and a strong tendency to cut them during bad times. By separating these conditions, the study reveals that the "stickiness" of costs is not a static number but a variable response that shifts with the tides of the economy. This insight helps explain why different studies in different countries have found conflicting results about cost behavior; the relationship between growth and cost cutting is not universal but depends on the specific economic and institutional setting. As accounting rules around the world begin to require more detailed breakdowns of expenses, similar patterns may become visible in other markets, offering a clearer picture of how businesses truly navigate the ups and downs of the economic cycle.
Drowning in papers in your field?
Get daily digests of the most novel papers matching your research keywords — with technical summaries, in your language.