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Asymmetric Cost Behavior and Dividend Policy

51 Pages Posted: 17 Jan 2016 Last revised: 9 Jan 2018

Jie He

University of Georgia - Department of Finance

Xuan Tian

Tsinghua University - PBC School of Finance

Huan Yang

University of Massachusetts Amherst - Department of Finance

Luo Zuo

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: January 8, 2018

Abstract

A prevalent phenomenon documented in the recent accounting literature is that costs are sticky, i.e., they fall less for sales decreases than they rise for equivalent sales increases. We examine whether and how this asymmetric cost behavior affects a firm’s dividend policy. Given managers’ reluctance to cut dividends, we predict that firms with stickier costs pay out a lower amount of dividends than firms with less sticky costs. To establish causality, we use a regression discontinuity design that exploits locally exogenous variation in labor adjustment costs and thus cost stickiness. Specifically, our approach compares dividend payout ratios of firms that barely pass union elections to those of firms that barely fail the elections. We find evidence consistent with our prediction. Our paper sheds new light on the determinants of dividend policy and the role of cost behavior in corporate decisions.

Keywords: Asymmetric cost behavior; cost stickiness; dividend policy; labor adjustment cost; regression discontinuity design

JEL Classification: G31; G35; J51; M41

Suggested Citation

He, Jie and Tian, Xuan and Yang, Huan and Zuo, Luo, Asymmetric Cost Behavior and Dividend Policy (January 8, 2018). Available at SSRN: https://ssrn.com/abstract=2716565 or http://dx.doi.org/10.2139/ssrn.2716565

Jie He

University of Georgia - Department of Finance ( email )

B318 Amos Hall
Terry College of Business, University of Georgia
Athens, GA 30602-6253
United States

Xuan Tian (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

Huan Yang

University of Massachusetts Amherst - Department of Finance ( email )

121 Presidents Drive
Amherst, MA 01003
United States

Luo Zuo

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

349 Sage Hall
Ithaca, NY 14853
United States
607-255-4002 (Phone)

HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile/id/lz352

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