Asymmetric Cost Behavior and Non-Financial Firms’ Risky Financial Investments

94 Pages Posted: 26 Jul 2023 Last revised: 23 Apr 2024

See all articles by Ji Hoon Hwang

Ji Hoon Hwang

University of Arizona, Eller College of Management, Department of Finance, Students

Date Written: July 20, 2023

Abstract

Using hand-collected data on non-financial firms’ financial portfolios, I examine how asymmetric cost behavior (or cost stickiness) affects risky financial investments. Sticky costs amplify the downward effect of sales decrease on profits because costs do not fall when sales decrease by as much as they rise when sales increase. I find that firms with sticky costs avoid risky financial investments because of expected liquidity needs and the trade-off between operating and financial risk. Oster’s delta and shock-based instrumental variable design address endogeneity concerns. For firms with sticky costs, investing in risky securities subdues non-financial investments and increases a firm’s risk exposure without creating shareholder value.

Keywords: Risky Financial Investments, Asymmetric Cost Behavior, Cost Stickiness, Precautionary Saving

JEL Classification: D22, G32, G39, M41

Suggested Citation

Hwang, Ji Hoon, Asymmetric Cost Behavior and Non-Financial Firms’ Risky Financial Investments (July 20, 2023). Available at SSRN: https://ssrn.com/abstract=4515710 or http://dx.doi.org/10.2139/ssrn.4515710

Ji Hoon Hwang (Contact Author)

University of Arizona, Eller College of Management, Department of Finance, Students ( email )

McClelland Hall
P.O. Box 210108
Tuscon, AZ 85721
United States

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