Terrorist Attacks and Resource Adjustments

Prior studies show that resource adjustment costs and managerial discretion are important in the cost management. Recent studies suggest that behavioral biases can influence managerial discretion. We examine whether irrational pessimism induced by terrorism affects the sensitivity of costs to changes in sales. Compared with firms located far from terrorist attacks, firms located near terrorist attacks reduce resource levels more when sales decline and increase them to a lesser extent when sales increase. Additional analyses show that the effect of terrorist attack is more marked in the firms influenced by optimism previously and in regions with a lower male ratio