Authors: Dimitrios Ntounis, Orestis Vlismas

Title: Asymmetric Cost Behaviour and Financial Distress

Abstract

This study explores the effect of financial distress on the intensity of asymmetric cost behavior. Cost asymmetry refers to the different (i.e., asymmetric) response of variable costs between increases or decreases in the level of a firm’s operating activity due to deliberate managerial resource commitment decisions to maintain idle resources when the activity volumes decline. High levels of financial distress increase the cost of maintaining idle resource capacity, decrease the intensity of the managerial building behavior and managerial optimism for future sales revenues. As a result, financial distress is negatively associated with the intensity of cost asymmetry. Our data sample consists of 39,350 firm-year observations from 27 countries over the period 2005-2019. We provide evidence that, on average, financial distress decreases the intensity of cost asymmetry of SG&A expenses, cost of goods sold and operating expenses. Additional robustness tests confirm the negative relationship of financial distress with cost asymmetry.