Cost Stickiness and Credit Risk

53 Pages Posted: 9 Jun 2016 Last revised: 10 Sep 2020

See all articles by Carsten Homburg

Carsten Homburg

University of Cologne

André Hoppe

University of Cologne

Julia Nasev

Ludwig-Maximilians-University Munich

Kristina Reimer

University of Cologne

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance

Date Written: August 1, 2018

Abstract

We document that cost stickiness is priced in the CDS market. More specifically, we show that creditors require higher risk premiums for sticky firms consistent with stickiness increasing asset volatility. In addition, we find that creditors require lower or no risk premiums if stickiness is efficient and increases asset values. This is the case (1) if stickiness is based on strategic costs like R&D and SG&A rather than operating costs like COGS, (2) for sticky firms with higher cost adjustment flexibility signaling that costs are kept intentionally because sales growth expectations are favorable, (3) for sticky firms with higher managerial quality and (4) for sticky firms with fewer empire building possibilities. We contribute to the accounting literature on asymmetric cost behavior by documenting a new capital market consequence of sticky cost and to the finance and accounting literature on credit risk by identifying a new credit risk factor.

Keywords: Cost Stickiness, Cost Behavior, Credit Risk, Credit Default Swaps

JEL Classification: M41, G32

Suggested Citation

Homburg, Carsten and Hoppe, André and Nasev, Julia and Reimer, Kristina and Uhrig-Homburg, Marliese, Cost Stickiness and Credit Risk (August 1, 2018). Available at SSRN: https://ssrn.com/abstract=2792085 or http://dx.doi.org/10.2139/ssrn.2792085

Carsten Homburg

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

André Hoppe (Contact Author)

University of Cologne ( email )

Albertus Magnus Platz
Cologne, NRW 50923
Germany

Julia Nasev

Ludwig-Maximilians-University Munich ( email )

Geschwister-Scholl-Platz 1
Munich, 80539
Germany

Kristina Reimer

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, DE 50923
Germany
+49 (0)221 470-1668 (Phone)
+49 (0)221 470-5012 (Fax)

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance ( email )

P.O. Box 6980
D-76049 Karlsruhe, DE
Germany
+49 721 6084 8183 (Phone)
+49 721 6084 8190 (Fax)

HOME PAGE: http://derivate.fbv.kit.edu/english/index.php

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