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Does Cost Management Affect Credit Risk?

63 Pages Posted: 9 Jun 2016 Last revised: 22 Jun 2016

Carsten Homburg

University of Cologne

Julia Nasev

University of Cologne

Kristina Reimer

University of Cologne

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance

Date Written: June 8, 2016

Abstract

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

Homburg, Carsten and Nasev, Julia and Reimer, Kristina and Uhrig-Homburg, Marliese, Does Cost Management Affect Credit Risk? (June 8, 2016). 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

Julia Nasev

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany
+492214706830 (Phone)
+492214705012 (Fax)

Kristina Reimer (Contact Author)

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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