EXPERIMENTAL EVIDENCE OF ASYMMETRIC COST BEHAVIOR: THE EFFECTS OF DECISION HORIZON AND INCENTIVE CONTRACTS ON PRODUCTION DECISIONS

Firms with asymmetric cost behaviors tend to experience undesirable consequences (e.g., low credit ratings). Production decisions affect firms’ cost levels; thus, production decision asymmetry leads to cost asymmetry. In this study, I investigate how different levels of optimism, induced by decision horizon lengths and outcome level desirability, affect how much managers decide to produce their products for future periods. Specifically, I study the levels of asymmetry in managers’ production decisions (e.g., how much they decide to produce) between sales forecast increase versus sales forecast decrease. The results of this study provide evidence that, in general, managers make asymmetric production amount decisions, and long decision horizons induce managers to make more asymmetric production decisions between sales forecasts decrease versus increase. The results also demonstrate that, under long decision horizons, when managers’ incentives are tied to the future outcomes of their production decisions, their decisions are more asymmetric than when their incentives are not tied to the future outcomes. That is, firms can attenuate production decision asymmetry by using fixed incentive contracts. However, the results do not provide evidence that optimism mediates the association between decision horizon, outcome desirability, and production decisions. This study contributes to the cost accounting literature by providing experimental evidence of asymmetric production decisions and by responding to the call for research examining managers’ judgments and decisions in firms’ cost behaviors. Furthermore, this study contributes to the literature by providing evidence that asymmetric production decisions, hence asymmetric cost behaviors, may occur without the effects of fixed costs