Asymmetric Cost Behavior and Dividend Policy

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