Asymmetric Cost Behavior and Dividend Policy
Journal of Accounting Research, Volume 58, Issue 4, September 2020
Posted: 2 Dec 2020
Date Written: September 1, 2020
Costs are sticky on average, that is, they fall less for sales decreases than they rise for equivalent sales increases. We examine the effect of this asymmetric cost behavior on a firm's dividend policy. Given investors’ aversion to dividend cuts, we predict that firms with higher resource adjustment costs and stickier costs pay lower dividends than their peers because they are less able to sustain any higher level of dividend payouts in the future. We find evidence consistent with this prediction. Further, using a regression discontinuity design that exploits variation in labor adjustment costs generated by close‐call union elections, we provide evidence suggesting that the negative relation between cost stickiness and dividend payouts is driven by resource adjustment costs. Our paper sheds new light on the determinants of dividend policy and demonstrates the role of cost behavior in corporate decisions.
Keywords: Asymmetric cost behavior; cost stickiness; dividend payouts; resource adjustment cost
JEL Classification: G31; G35; J51; M41
Suggested Citation: Suggested Citation