COVID-19 Pandemic, Cost Stickiness, and Profitability

Cost stickiness refers to an increase in costs when activities increase more than a decrease in costs in response to a decline in activities of the same magnitude. In this respect, managers play a crucial role in resource adjustment decisions, and various factors affect these decisions, including managerial optimism. In turn, managerial optimism is affected by economic conditions and economic crises, including the latest one affected by the Covid-19 pandemic. This will greatly reduce managerial optimism and motivate them to reduce greater resources when sales decline, even greater than the sales decline. Accordingly, this study tests the relationships between The Covid-19 pandemic, cost stickiness, and profitability of Indonesian listed firms in 2018-2020. We find that (1) firms reduce SG&A costs more to respond to sales decline during The Covid-19 pandemic, and (2) firms experiencing sales decline during The Covid-19 pandemic even exhibit better financial performance. Thus, this study indicates that higher profits are not always affected by increased income but also probably by cost decline that is greater than sales decline.