How Cost Stickiness Affects Credit Risk

44 Pages Posted: 16 Aug 2018

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 16, 2018

Abstract

In this paper, we document strong evidence for an impact of asymmetric cost behavior – more precisely cost stickiness – on credit risk. An increase by one standard deviation in (aggregate) cost stickiness leads to a 27 basis points increase in Credit Default Swap (CDS) spreads on average, which equals an increase in cost of debt by 27 basis points. This finding holds for CDS on both senior and subordinated debt of all maturities and is most pronounced for short-term spreads, which is consistent with structural credit model expectations. Analyzing the relation in more detail, we show that cost stickiness caused by inflexibility in cost adjustment – measured by an employee protection law – is positively and significantly related to corporate credit risk. In contrast, stickiness arising in firms with high flexibility in cost adjustment decreases corporate credit risk. Consistently, we also find different effects across different cost categories. For sticky R&D costs, which are highly flexible, we find a decrease in CDS spreads by nearly 100 basis points. In contrast, sticky operating costs, which due to a higher fix cost portion are less flexible, increase CDS spreads by 48 basis points.

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, How Cost Stickiness Affects Credit Risk (August 16, 2018). AAA 2019 Management Accounting Section (MAS) Meeting, Available at SSRN: https://ssrn.com/abstract=3232822

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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