Cost Behavior and Stock Returns

49 Pages Posted: 1 Jul 2014 Last revised: 14 Jul 2017

See all articles by Dashan Huang

Dashan Huang

Singapore Management University - Lee Kong Chian School of Business

Fuwei Jiang

Central University of Finance and Economics (CUFE)

Jun Tu

Singapore Management University - Lee Kong Chian School of Business

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School; China Academy of Financial Research (CAFR)

Date Written: July 1, 2017

Abstract

This paper shows that investors do not fully incorporate cost behavior information into valuation. Firms with higher growth in operating costs generate substantially lower future stock returns and operating performance. An equal-weighted long-short spread portfolio earns an average return of 82 basis points per month that is robust to a number of specifications. The negative cost growth-return relation is much stronger around earnings announcement days and among firms with lower investor attention, higher idiosyncratic volatility, and higher transaction costs, suggesting that investor underreaction and limits to arbitrage mainly drive the effect.

Keywords: Cost behavior; sticky costs; operating costs; investor underreaction; limits to arbitrage

JEL Classification: M41, D21, G12, G14

Suggested Citation

Huang, Dashan and Jiang, Fuwei and Tu, Jun and Zhou, Guofu, Cost Behavior and Stock Returns (July 1, 2017). Asian Finance Association (AsianFA) 2015 Conference Paper. Available at SSRN: https://ssrn.com/abstract=2460540 or http://dx.doi.org/10.2139/ssrn.2460540

Dashan Huang (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore

HOME PAGE: http://dashanhuang.weebly.com/

Fuwei Jiang

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Jun Tu

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
#04-01
Singapore, 178899
Singapore

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

China Academy of Financial Research (CAFR)

Shanghai Advanced Institute of Finance
Shanghai P.R.China, 200030
China

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