Does Cost Management Affect Credit Risk?
63 Pages Posted: 9 Jun 2016 Last revised: 22 Jun 2016
Date Written: June 8, 2016
This paper documents strong evidence for an impact of cost behavior on credit risk. We find that cost stickiness is positively and significantly related to firm credit risk after controlling for well-known credit risk determinants. In particular, one standard deviation increase in cost stickiness leads to a 27 basis points increase in Credit Default Swap (CDS) spreads on average. The findings hold for CDS on both senior and subordinated debt of all maturities and are robust to different lag structures, variable measurement, and alternative model specifications. Overall, the findings are consistent with a structural credit model perspective: More stickiness leads to higher earnings volatility and therefore higher asset volatility and higher uncertainty about the asset value, which increases the firm’s default probability and credit risk.
Keywords: Cost Stickiness, Cost Behavior, Credit Risk, Credit Default Swaps
JEL Classification: M41, G32
Suggested Citation: Suggested Citation