Product market competition and cost stickiness

Product market competition and cost stickiness Extant literature on cost stickiness has focused on how firm-specific characteristics affect the asymmetric cost behavior. In this paper, we explore how a firm’s operating environment affects the firm’s cost stickiness. Specifically, we examine the effect of product market competition on cost stickiness since a firm’s investment and cost retention decisions partly depend on how the firm interacts with its rival firms in the product markets. Using two firm-level text-based product market competition measures extracted from management disclosures in firms’ 10-K filings (Li et al. in J Account Res 51(2):399–436, 2013; Hoberg and Phillips in Rev Financ Stud 23(10):3773–3811, 2010; J Polit Econ, 2015), we find strong evidence consistent with cost asymmetry increasing in competition after controlling for known economic determinants of cost stickiness. In additional analyses, we also find that the effect of product market competition on the degree of cost stickiness increases in firms’ financial strength, likely because management in financially stronger firms has more resources for investment expenditures in spite of a sales fall. We also find that cost stickiness is increasing in competition if management is optimistic about future demand, whereas competition is not associated with cost asymmetry if management is pessimistic about future demand. Finally, we find that the relationship between competition and cost stickiness, although statistically insignificant at conventional levels, is more pronounced for single-segment firms relative to multi-segment firms. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Product market competition and cost stickiness

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Publisher
Springer US
Copyright
Copyright © 2016 by Springer Science+Business Media New York
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-016-0591-z
Publisher site
See Article on Publisher Site

Abstract

Extant literature on cost stickiness has focused on how firm-specific characteristics affect the asymmetric cost behavior. In this paper, we explore how a firm’s operating environment affects the firm’s cost stickiness. Specifically, we examine the effect of product market competition on cost stickiness since a firm’s investment and cost retention decisions partly depend on how the firm interacts with its rival firms in the product markets. Using two firm-level text-based product market competition measures extracted from management disclosures in firms’ 10-K filings (Li et al. in J Account Res 51(2):399–436, 2013; Hoberg and Phillips in Rev Financ Stud 23(10):3773–3811, 2010; J Polit Econ, 2015), we find strong evidence consistent with cost asymmetry increasing in competition after controlling for known economic determinants of cost stickiness. In additional analyses, we also find that the effect of product market competition on the degree of cost stickiness increases in firms’ financial strength, likely because management in financially stronger firms has more resources for investment expenditures in spite of a sales fall. We also find that cost stickiness is increasing in competition if management is optimistic about future demand, whereas competition is not associated with cost asymmetry if management is pessimistic about future demand. Finally, we find that the relationship between competition and cost stickiness, although statistically insignificant at conventional levels, is more pronounced for single-segment firms relative to multi-segment firms.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Jul 27, 2016

References

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