Rahman, AsheqKabir, HumayunScott, TomGhazy, Walaa2023-10-022023-10-022023http://hdl.handle.net/10292/16732Innovation in new products and processes has become increasingly important for companies to achieve and maintain their competitive advantage in the current rapidly changing environment. This thesis aims to investigate cost stickiness behaviour in research and development (R&D) firms and examine the determinants and consequences of this behaviour. The thesis includes three related empirical studies on cost stickiness in R&D firms. The first study uses the evolutionary theory of the firm to investigate whether R&D intensity is a determinant of cost stickiness. The evolutionary theory of the firm integrates the implications of innovative activity characteristics, notably features of entrepreneurial and experiential behaviour, for resource allocation decisions. According to this theory, the firm is an adaptive entity that develops and adapts its competencies and processes to the changes in its environment. The results reveal a statistically significant positive association between R&D intensity and cost stickiness. Further analysis confirms that the positive association between R&D intensity and cost stickiness prevails only in R&D-intensive firms. These results support the propositions of the evolutionary theory of the firm that innovative firms tend to retain the allocated resources when demand falls to preserve the firm’s organisational memory and to reduce interorganisational conflict between the members of the firm. Simultaneously, managers of these firms redirect the existing resources towards searching for an alternative routine to cope with the adverse market conditions, which increases cost stickiness. The second study extends the prior research and examines the relationship between cost stickiness and earnings informativeness in R&D firms. The study also investigates whether R&D intensity moderates the association between cost stickiness and the earnings-returns relationship. The results suggest that the adverse effect of cost stickiness on earnings informativeness reported in the literature is not applicable to R&D firms. The study also shows that higher R&D intensity attenuates the previously reported negative impact of cost stickiness on earnings informativeness. Finally, I find that cost stickiness is positively associated with earning informativeness only in R&D-intensive firms. These results suggest that accounting earnings signal relevant information when firms with sticky costs invest their resources in R&D activities. The third study examines the role of uncertainty in shaping cost behaviour during the COVID-19 crisis and whether the government’s intervention policy mitigates it. It also evaluates whether R&D-intensive firms respond differently to uncertainty and show a different level of cost stickiness in their financial statements during the crisis. The results show that cost stickiness declines with the severity of the COVID-19 crisis, indicating that managers reduce the committed resources and lay off their employees when demand decreases to avoid retaining them at a loss. However, it is hard for managers to accommodate the growth in demand by increasing their resources due to input scarcity and supply chain disruptions during the COVID-19 pandemic. The results also indicate that the government income support was insufficient to attenuate workplace closure’s negative impact on firms’ cost stickiness. However, the significant adverse impact of the COVID-19 crisis on cost stickiness is not observed in R&D-intensive firms, indicating that firms that invested in R&D and technology during the crisis were able to retain their resources and redirect them towards the recovery process. In sum, cost stickiness behaviour observed in the financial statements of R&D-intensive firms is driven by the capabilities’ retention triggers and has other consequences on earnings properties than those observed in non-R&D firms. Cost stickiness is a natural result of how managers in R&D-intensive firms make their operating decisions and allocate resources during hard times. Even in the case of an unprecedented crisis such as the COVID-19 pandemic, managers of innovative firms preserve the firm’s resources and capabilities to retain their competitive advantage and reinvest them in the recovery process.enOpenAccess