How Asymmetric Cost Behavior Relates to Payout Policy

Abstract

In explaining asymmetric cost behavior, i.e. cost stickiness and anti-stickiness, there are mainly three different channels. Firstly, cost stickiness can be explained by rational positive management expectations about future customer demand. Secondly, it may be the result of behavioral biases such as CEO overconfidence. Thirdly, cost stickiness can occur due to agency-related issues such as empire building. This paper challenges the rational channel, as it is arguably the most important one. To this end, we analyze the relation of cost stickiness to payout policy, the latter being a strong signal for management expectations on future profitability. We find that asymmetric cost behavior is positively and significantly related to corporate payouts. By taking recent findings on the changing implications of payouts across time into account and by differentiating between dividends and stock repurchases, we further show that this relation is particularly pronounced when the signaling effect of payouts is more reliable.

Keywords: Cost Stickiness, Cost Anti-Stickiness, Asymmetric Cost Behavior, Dividends, Stock Repurchases, Share Repurchases, Buybacks, Payout Policy, Signaling

JEL Classification: M41, G11, G35