Hidden in the Average: When Cost Stickiness Varies with Economic Growth
This paper reveals that while selling expenses in Vietnamese non-financial firms appear symmetric on average, their response to sales declines is actually state-dependent, becoming less sticky during periods of strong economic growth because macroeconomic conditions alter the information content of firm-specific demand shocks.
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, from a small bakery to a massive factory, faces a fundamental choice whenever its sales drop. It must decide whether to immediately cut back on the resources it uses to sell its products—such as advertising, sales staff, and distribution networks—or to hold onto them in hopes that demand will return soon. This decision is rarely simple. Hiring and firing people, signing and canceling contracts, and shutting down or reopening facilities all come with real costs and disruptions. Because of these hurdles, companies often keep their resources even when sales fall, a phenomenon economists call "cost stickiness." It is like a heavy door that is easy to push open when business is booming but difficult to slam shut when business slows down. For decades, researchers have studied this behavior by looking at the average reaction of companies over many years, assuming that a drop in sales triggers a predictable, uniform response.
However, a new study suggests that this average view might be hiding a crucial truth. The researchers, based at the Industrial University of Ho Chi Minh City, propose that the same drop in sales does not carry the same meaning in every economic climate. When the overall economy is growing strongly, a single company's sales decline might look like a temporary blip, encouraging managers to keep their resources ready for a quick recovery. But when the broader economy is weak, that same decline might signal a long-term problem, prompting managers to cut costs aggressively. By averaging these two very different reactions together, the true nature of the decision-making process can disappear, making it look as though companies are reacting symmetrically when they are actually responding to the hidden context of the times.
To uncover this hidden pattern, the team analyzed data from nearly 6,000 non-financial companies listed on the stock exchanges in Ho Chi Minh City and Hanoi, Vietnam, covering the years from 2015 to 2025. Vietnam provided a unique opportunity for this investigation because its accounting rules require companies to report their selling expenses and administrative expenses as separate line items. This separation allowed the researchers to look closely at the specific costs associated with selling products, such as marketing and sales commissions, rather than just looking at a broad, mixed category of general expenses. The researchers examined how these costs changed when sales went up versus when they went down, and they specifically tested whether the strength of the country's economic growth changed how companies reacted to a sales drop.
The study began by confirming what previous research had often found: when looking at the raw average over the entire decade, the costs associated with selling products did not show a strong, consistent pattern of stickiness. In other words, the data suggested that companies were cutting selling expenses almost as quickly as they were increasing them when sales fell, which contradicted the traditional idea of sticky costs. However, this average view changed dramatically once the researchers introduced the condition of economic growth. When they separated the data by years of strong economic expansion versus years of slower growth, a clear and consistent pattern emerged. In years when the Vietnamese economy was growing rapidly, companies were much less likely to cut their selling expenses after a sales decline. They held onto these resources, likely believing the downturn was temporary. Conversely, in years of slower economic growth, the same sales decline triggered much sharper cuts in selling expenses.
This finding was robust, holding true even when the researchers tested their data with different statistical methods, removed specific years to check for outliers, or adjusted for inflation. The results were particularly striking for selling expenses, which had appeared to show no stickiness in the average view but revealed a strong, systematic reaction to the economic environment once the context was considered. The researchers also compared these results with administrative expenses, which cover things like office management and human resources. While administrative costs also showed some sensitivity to economic growth, the selling expenses provided the clearest evidence that the "average" reaction was misleading. The study further ruled out the possibility that these results were simply caused by general price changes or inflation, confirming that the real growth of the economy was the driving factor.
The implications of this discovery are significant for how we understand business behavior. It suggests that a weak or non-existent average cost-stickiness coefficient does not necessarily mean that companies are adjusting their resources symmetrically. Instead, it can mean that the companies are reacting differently depending on the state of the economy, and these opposing reactions cancel each other out when viewed as a single average. The study indicates that the information a manager receives from a sales drop depends heavily on the broader economic backdrop. A decline during a boom is treated differently than a decline during a slump, and this distinction is vital for understanding how businesses manage their resources. As accounting standards in other parts of the world, including the United States, begin to require more detailed reporting of selling expenses, this research offers a new lens for interpreting corporate behavior, reminding us that the average can often conceal the most important details of how the economy truly works.
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