The traditional view of cost behavior assumes a simple mechanistic relation between cost drivers and costs. In contrast, contemporary cost management research recognizes that costs are caused by managers' operating decisions subject to various constraints, incentives, and psychological biases. This conceptual innovation opens up the “black box” of cost behavior and gives researchers a powerful new way to use observed cost behavior as a lens to study the determinants and the consequences of managers' operating decisions. Banker and Byzalov (2014) presented an overview of the economic theory of cost behavior and major estimation issues. The research literature on cost management has grown rapidly in the past few years and has enhanced the understanding of how managerial decisions influence observed costs. In this study, we provide a comprehensive review of recent findings and insights, with a particular emphasis on the implications of cost management for understanding issues in cost, managerial, and financial accounting, and challenges and opportunities for future research.

No abstract

We review the recent theoretical and empirical literature on debt covenants with a particular focus on how creditor governance after covenant violations can influence the borrower's corporate policies. From the theoretical literature, we identify the key trade-offs that help explain the observed heterogeneity in covenant types, inclusion, likelihood of violation, and postviolation renegotiation flexibility. Empirically, we first review the literature that deals with ex ante evidence on covenant design and the various factors that influence covenant design; we next review the ex post evidence on the impact of technical covenant violations on the borrower. We then discuss limitations of the existing theoretical and empirical studies and conclude with some directions for future research in this burgeoning area.

No abstract

Operating performance is an important and widely used measure for evaluating firms. This paper documents that, contrary to the common belief, firms experiencing sales declines during economic slowdowns exhibit higher operating margins than firms experiencing sales declines during normal periods. This anomalous behavior results from (1) a decrease in costs of goods sold overall during economic slowdowns and (2) an additional reduction in SG&A costs other than expenditures that could affect the competitiveness (i.e., R&D and advertising) of sales-down firms. The relatively higher operating performance reported by sales-down firms during economic slowdowns is associated with improvements in operational efficiency and cannot be explained as earnings management or simply as a response to financial distress or a large sales decline. Our findings provide important insights into how macroeconomic conditions affect firms' operating performance in a predictable way.