Asymmetric Cost Behavior and Dividend Policy

57 Pages Posted: 17 Jan 2016 Last revised: 3 Dec 2019

See all articles by Jie He

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: November 27, 2019

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 investors’ aversion to dividend cuts, we predict that firms with higher resource adjustment costs and stickier costs pay lower dividends than their peers because they are less able to sustain any higher level of dividend payouts in the future. 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 payouts; resource adjustment cost

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 (November 27, 2019). 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

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 (Contact Author)

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-research/faculty/lz352/

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