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Asymmetric Cost Behavior and Dividend Policy
Authors:JIE HE  XUAN TIAN  HUAN YANG  LUO ZUO
Affiliation:1. Terry College of Business, University of Georgia;2. PBC School of Finance, Tsinghua University;3. Isenberg School of Management, University of Massachusetts Amherst;4. Johnson Graduate School of Management, Cornell University
Abstract: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
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