Unraveling the Black Box of Cost Behavior: An Empirical Investigation of Risk Drivers, Managerial Resource Procurement, and Cost Elasticity

Abstract

This paper extends prior literature on cost behavior by providing insights into how firms achieve changes to cost structure in response to two important risk drivers, i.e., demand uncertainty and financial risk. Using theory from labor economics, supply-chain management, and finance, we posit that demand uncertainty and financial risk influence cost management activities. Specifically, we argue that firms are likely to alter resource procurement choices to increase cost elasticity in response to these two risk drivers. We use data from California hospitals that allow for the calibration of three distinct resource procurement choices that increase cost elasticity: outsourcing, leasing of equipment, and hiring contract labor. Mediation analysis using 2,202 hospital year observations indicates that both demand uncertainty and financial risk influence cost elasticity. Importantly, these effects are mediated by the three aforementioned resource procurement choices. Overall, our findings support the view that firms make procurement choices to manage the risk associated with cost structures. Data Availability: Data used in this study are publicly available from the Office of Statewide Health Planning and Development (see: http://www.oshpd.ca.gov/). JEL Classifications: I18; M41.

Management Accountant—What Ails Thee?

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Business Strategy, State-Owned Equity and Cost Stickiness: Evidence from Chinese Firms

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Management Accounting and Control in the Hospital Industry: A Review

“…The healthcare sector offers publicly available data with a rich granularity that facilitates the testing of management accounting theories. For example, data from California hospitals include cost report information, nonfinancial measures, and patient discharge information and have frequently been used to study a variety of accounting issues including compensation, outsourcing, governance, and the effects of factors such as ownership and competition on investments in accounting systems (Balakrishnan et al 2010;Duggan 2000;Eldenburg andKrishnan 2003, 2008;Holzhacker et al 2015b;Krishnan 2005). Data from Washington State hospitals include budgeted and actual information and have been used to study cost structure, cost behaviors Soderstrom 1994, 1997;Kallapur and Eldenburg 2005), and the effects of regulation on management behavior such as cost shifting (Blanchard, Chow, and Noreen 1986;Eldenburg and Soderstrom 1996;Eldenburg and Kallapur 1997).…”