Asymmetric Cost Behavior and Dividend Policy

Abstract

A prevalent phenomenon documented recently is that costs are sticky, i.e., they fall less for sales decreases than they rise for equivalent sales increases. We examine the effect of this asymmetric cost behavior on a firm’s dividend policy. Given managers’ reluctance to cut dividends, we predict that firms with higher resource adjustment costs and stickier costs pay lower dividends than their peers. We find evidence consistent with this prediction. Further, using a regression discontinuity design that exploits variation in labor adjustment costs generated by close-call union elections, we provide evidence suggesting that the negative relation between cost stickiness and dividend payouts is driven by resource adjustment costs. Our paper sheds new light on the determinants of dividend policy and demonstrates the role of cost behavior in corporate decisions.

Keywords: Asymmetric cost behavior; cost stickiness; dividend payout; adjustment cost

JEL Classification: G31; G35; J51; M41