The Managerial Perception of Uncertainty and Cost Elasticity

48 Pages Posted: 17 Jun 2020 Last revised: 24 May 2023

See all articles by Jason V. Chen

Jason V. Chen

University of Illinois at Chicago

Itay Kama

University of Michigan, Stephen M. Ross School of Business

Reuven Lehavy

University of Michigan, Stephen M. Ross School of Business

Date Written: May 24, 2023

Abstract

Theoretical research demonstrates the important role of uncertainty in shaping a firm’s cost elasticity. We contribute to this literature by analyzing the inherent tension between the effects of uncertainty about unit contribution margin (CM) and sales volume on cost elasticity. We identify the occurrence of words implying uncertainty in managerial forward-looking statements and employ a novel methodology to construct distinct measures of the managerial perceptions of overall, unit CM, and volume uncertainty. We find a significantly positive (negative) association between the uncertainty about unit CM (volume) and cost elasticity. These associations vary predictably with firm and industry characteristics. Our empirical evidence supports the theoretical argument that managerial perceptions of uncertainty and its components differentially influence their resource allocation decisions and suggests that any analysis of the relation between uncertainty and a firm’s cost elasticity should specify the type of uncertainty as well as the firm and industry characteristics.

Keywords: uncertainty, volume, unit contribution margin, price, cost elasticity, demand, forward-looking statements, textual analysis

JEL Classification: M41, D24

Suggested Citation

Chen, Jason V. and Kama, Itay and Lehavy, Reuven, The Managerial Perception of Uncertainty and Cost Elasticity (May 24, 2023). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3608218 or http://dx.doi.org/10.2139/ssrn.3608218

Jason V. Chen

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

Itay Kama (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-4538 (Phone)

Reuven Lehavy

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-763-1508 (Phone)
734-936-0282 (Fax)

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