AAA Spark Meeting of the Regions

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

• In Event: Cost Behaviors

Abstract

Owing to a lack of data, research on the determinants of industrial firms’ risky financial investments has been limited despite their value-decreasing potential. Using a hand-collected sample of an industrial firm’s financial portfolio, I examine whether asymmetric cost behavior (cost stickiness) affects risky financial investments. Sticky costs reduce future expected earnings because costs do not fall when sales decrease as much as they rise when sales increase. Despite the motive for ‘reaching for yield,’ I find that firms with sticky costs avoid risky financial investments because of expected liquidity needs and the trade-off between operating risk and financial risk. First-differencing, Oster’s delta, instrumental variable analysis, difference-in-differences analysis, and synthetic control method address endogeneity concerns.

Author

• JiHoon Hwang, The University of Arizona